Price Stability

Topics: Supply and demand, Consumer theory, Elasticity Pages: 2 (720 words) Published: July 5, 2012
1’’Price stability is the economic term used to refer to a situation where the general price level covering consumer goods remain unchanged or if it does change, it happens at a low rate so that it is not strong enough to make any significant influence on economic decision of participants in a economy. We encounter prices in different forms in our daily life activities as buyers or sellers when we get engaged in consumption, investment or trade. In market economy, price changes are a common phenomenon depending on the demand and supply goods and services. Since price changes in both directions and a different magnitudes, is difficult to figure out the general movement in prices by examining each individual price change. Therefore the general price level is used to capture the overall impact of individual price movements. In a free market economy, prices signal the prevailing demand and supply conditions and their changes. In the short run, there is a large number of factors that affect demand and supply, for example, weather, social and cultural events, purchasing power of people, consumer preferences, innovations, productivity etc. We know that rice prices fall during harvest periods due to a greater supply and prices of vegetables rise following a drought, reflecting a drop in production. Similarly, in general, prices of food items tend to rise during festive seasons, such as New Year and Christmas, due to demand being greater than regular supply. However, such price changes resulting from seasonal factors are temporary phenomena and prices readjust themselves within a short period. On the other hand in the long run there are also some factors that affect the demand and supply but is known that in a long run people, banks, companies have the time to decide how many resources to develop in that way can increase or decrease output being the supply more elastic. Now talking about the price elasticity of demand we can define it as how demand...

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