Consider the following dialogue between two economics students, Ginny and Kenji,

Question

Consider the following dialogue between two economics students, Ginny and Kenji, after a recent economics lecture. GINNY: Hi Kenji. Today the professor said that the market decides how much of each good or service to produce. I don't understand what that means. Nobody decides how many goods to produce. Doesn't it just happen randomly? I'm so confused! KENJI: Okay, I see where you are confused. Let's run through it one more time. You are correct that in a market system, no one person decides what quantities of goods to produce in the economy, though that may be the case in other types of economic systems. In a market economy, output levels are determined by individual producers and consumers buying and selling goods. Although there are millions of producers and consumers in the U.S. economy, the resulting amount of each good produced is far from random. Suppose that in the market for cars, more cars were produced than consumers wanted to buy. In other words, car producers have surplus cars that they cannot sell remaining cars. At this new price, some producers will be unwilling to supply any cars to the maket and will go out of business. will the price of each car in order to encourage to purchase the GINNY: Okay, that makes more sense. So if not enough cars are being produced, will offer to pay for each car, because cars are now relatively scarce. At this new price, producers will be willing to supply more cars to the market. KENJI: I think you are starting to get it! The professor was just saying that the amount of each good produced is determined by the interactions of individual producers and consumers. Eventually, the price will be such that the quantity of cars desired by consumers will be equal to the quantity of cars supplied to the market by producers. This is what the professor meant when he said that the market determines how much of each good is produced

Explanation / Answer

It has been provided that car producers have surplus cars that they cannot sell.

Surplus in the market create downward pressure on price.

So,

Producers will decrease the price of each car in order to encourage consumers to purchase the remaining cars.

In case, not enough cars are produced then there will be shortage of cars in market.

Shortage in themarket puts upward pressure on price and induce customers to pay more for the good.

So,

If not enough cars being produced, consumers will offer to pay more for each car, because cars are now relatively scarce.

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