Markets and Money: An In-Depth Look at Economic Systems
The Market and Money
In all economic systems, specialization is key. Companies produce, families consume, and the public sector regulates and controls. This specialization necessitates mechanisms for exchange: the market and money.
A. The Market
Originally a physical place for buying and selling goods, the term ‘market’ has evolved. Every market involves three elements: a product, a seller, and a buyer. ‘Market’ encompasses all trading activities of a product between suppliers (sellers) and buyers.
Demand
Buyers enter the market to acquire products in exchange for money. Demand is the quantity of goods buyers are willing to purchase at a specific price.
A. Factors Affecting Demand
While price is important, other factors also influence demand:
- Price of the product: Higher prices generally lead to lower demand, and vice versa.
- Price of related goods:
- Complementary goods: Goods consumed together (e.g., cars and gasoline). Price changes in one affect the demand for both.
- Substitute goods: Goods that fulfill the same need. A price increase in one substitute can decrease demand for the other.
- Disposable income: Purchasing power influences the quantity demanded. Goods are categorized as:
- Inferior goods: Demand decreases as income rises.
- Normal goods: Demand increases proportionally with income.
- Luxury goods: Demand increases significantly with higher incomes.
- Consumer preferences: Tastes and trends influence demand regardless of price or income.
Demand is the quantity of a good consumers are willing to buy at a certain price, considering related goods’ prices, disposable income, and preferences.
B. The Demand Curve
The demand curve visually represents the relationship between price and quantity demanded, assuming all other factors remain constant. It typically slopes downwards, reflecting the inverse relationship between price and quantity demanded.
Supply
Companies offer products in exchange for money, aiming to maximize profit. The price they can charge significantly influences production decisions. Supply is the amount of an asset companies are willing to produce at a specific price.
A. Factors Influencing Supply
- Price of the commodity: Higher prices generally incentivize higher production, assuming costs don’t rise proportionally.
- Cost of production factors: Production costs (wages, taxes, machinery) influence profitability and, consequently, supply.
- Business objectives: Company goals, such as maximizing production or market share, can influence supply.
Supply is the quantity of goods companies are willing to produce at a certain price, considering production costs (influenced by factor costs and technology) and business objectives.
B. The Supply Curve
The supply curve graphically represents the relationship between price and quantity supplied, assuming all other factors are constant. It usually slopes upwards, indicating a direct relationship.
Market Equilibrium
Market equilibrium occurs when buyer and seller plans align. Two scenarios can lead to equilibrium:
- Excess demand: Demand exceeds supply at a given price, leading to price increases and increased production until equilibrium is reached.
- Excess supply: Supply exceeds demand, causing price drops and decreased production until equilibrium is reached.
Market equilibrium is the point where supply and demand intersect, determining the equilibrium price and quantity.
Changes in Market Conditions
- Movements on the demand curve: Reflect changes in quantity demanded due to price changes, while other factors remain constant.
- Movements on the supply curve: Reflect changes in quantity supplied due to price changes, with other factors constant.
- Changes in other factors affecting demand: Shifts the demand curve right (increased demand) or left (decreased demand).
- Changes in other factors affecting supply: Shifts the supply curve right (increased supply) or left (decreased supply).
The Market and Competition
Markets facilitate the exchange of goods and services. They are categorized as perfectly competitive or imperfectly competitive.
Perfectly Competitive Markets
Characterized by numerous small firms with no influence on price, homogeneous products, and free entry and exit. Prices are determined by market forces.
Imperfectly Competitive Markets
One or more firms can influence price. Examples include:
- Monopoly: A single firm controls the market.
- Oligopoly: A few large firms dominate the market.
- Monopolistic competition: Many firms offer differentiated products.
A. Criteria for Classifying Markets
- Degree of concentration: Number of firms in the market.
- Influence on price: Ability of firms to affect price.
- Degree of homogeneity: Interchangeability of products.
- Intensity of competition: Level of rivalry among firms.
- Degree of transparency: Availability of price information.
- Freedom of entry and exit: Ease of entering or leaving the market.
B. Barriers to a Market
- Barriers to entry: Factors hindering new firms from entering (e.g., cost advantages, product differentiation).
- Exit barriers: Costs associated with leaving a market.
Perfectly competitive markets are rare in reality, with agricultural markets being the closest example. Monopolies arise from exclusive resource access or legal rights. Oligopolies involve strategic pricing and potential price wars or cartels. Monopolistic competition relies on product differentiation and advertising.