Market Dynamics: Understanding Supply, Demand, and Equilibrium
Understanding Market Dynamics
The market can be seen as a social institution where buyers and sellers interact to conduct transactions for goods and services.
Key Market Factors
Market factors influence the dynamics of supply and demand.
Demand
Demand represents the quantity and quality of goods and services consumers are willing to purchase at various prices within a specific timeframe.
Factors Affecting Demand
- Price: Generally, higher prices lead to lower demand, and vice versa.
- Income: Increased income typically results in higher demand for goods.
- Price of Related Goods: Prices of substitute or complementary goods can affect demand.
- Consumer Preferences: Shifts in consumer preferences can increase or decrease demand.
Demand Curve
The demand curve is a graph illustrating the quantity of goods or services consumers are willing to buy at different price points, assuming all other factors remain constant.
Price Demand Curve
This curve specifically shows how changes in the price of a good affect the quantity demanded.
Supply
Supply refers to the quantity of goods or services producers are willing to offer at different prices and conditions within a given time.
Factors Affecting Supply
- Price of the Commodity: Higher prices generally lead to a greater quantity supplied.
- Prices of Related Goods: If prices of related goods increase, the supply of the original good may decrease.
- Prices of Production Factors: Increased production costs can reduce supply.
- State of Technology: Technological advancements can increase supply.
- Business Objectives: Entrepreneurs aim to maximize profits, influencing supply decisions.
Supply Curve
The supply curve is a graph showing the quantity of goods or services companies are willing to sell at different price points, assuming all other factors remain constant.
Market Equilibrium
Equilibrium price is the point where the quantity supplied equals the quantity demanded.
Exchange Market: Instability can arise from high inflation and public deficits.
Shifts in the Demand Curve
Movement: Changes in price cause movement along the demand curve. Higher prices lead to lower quantities demanded, and vice versa.
Displacement: Shifts of the entire curve to the right or left occur due to changes in factors other than price.
Rightward Shift (Increase in Demand)
This occurs due to:
- Increased income
- Increased price of a substitute good
- Decreased price of a complementary good
- Changes in consumer preferences favoring the good
Leftward Shift (Decrease in Demand)
This occurs due to:
- Decreased income
- Decreased price of a substitute good
- Increased price of a complementary good
- Changes in consumer preferences against the good
Shifts in the Supply Curve
Rightward Shift (Increase in Supply)
This occurs due to:
- Decreased prices of related goods
- Reduction in production costs
- Technological improvements
- Changes in suppliers that increase supply
Leftward Shift (Decrease in Supply)
This occurs due to:
- Increased prices of related goods
- Increased production costs
- Technological dependence
- Changes in business objectives that decrease supply
A rightward shift in the demand curve increases both the equilibrium price and quantity. A rightward shift in the supply curve decreases the equilibrium price and increases the quantity.
A leftward shift in the demand curve decreases both the equilibrium price and quantity. A leftward shift in the supply curve increases the equilibrium price and decreases the quantity.
Laws of Supply and Demand
These laws describe how variables affect the quantity supplied and demanded.
Price Elasticity of Demand
This measures the percentage change in quantity demanded in response to a percentage change in price. Types include elastic, inelastic, and unitary.
Price Elasticity of Supply
This measures the percentage change in quantity supplied in response to a percentage change in price.