Understanding Market Dynamics: Demand and Supply Explained
The market is a set of offers of certain goods or services that are accompanied by their respective demands, also called marketplaces or institutions in which certain goods or services are exchanged for money. When the exchanges are performed using money, market players are called buyers and sellers or suppliers. There are two types of markets: market for goods and services, where the buyers are families and the sellers are businesses. In the factor market, the buyers are businesses and families providing factors (natural resources, capital, and labor) in exchange for money.
The demand for a commodity is the amount of that commodity that a buyer would be willing to purchase at a specified price during a specified time. The sum of individual demands is the market demand. The demand represents the desired amount, which indicates an intention to buy, but does not necessarily match what drives consumer purchases.
Factors affecting demand:
- a) Price of the good: The higher the price, the lower the quantity demanded. The relationship between the demand for a commodity and its price is inverse.
- b) The buyer’s income level: The relationship is usually direct; as income levels rise, the quantity demanded of a good increases.
- Normal goods: Demand increases as consumer income increases.
- Inferior goods: Demand decreases as consumer income increases.
- In normal goods, there are two types:
- Staple goods: Demand grows at a rate lower than income growth.
- c) Prices of other related items: The demand for a particular good can be influenced by the prices of complementary goods, which are used together to satisfy a need (e.g., a decrease in gasoline demand occurs when the price of vehicles increases). Additionally, when the price of substitute goods increases, the demand for its replacement rises, as they are used alternately to meet the same need (e.g., cinema and nightclubs).
- d) Consumer preferences: When consumers shift their preferences to certain goods, demand increases. The relationship between demand and consumer tastes is direct; both variables move in the same direction. Preferences are derived from the satisfaction gained from consuming the good.
In short, the quantity demanded of a good is influenced by these factors.
The demand curve is the graphic representation of the relationship between the price of goods and the quantity demanded, assuming that income, tastes, and other prices remain constant. It represents the desired purchases of goods at every possible price. If we represent the quantities and prices that correspond to one buyer, we will have an individual demand curve. If we aggregate this data, we will have a collective demand curve for the market. In both cases, the graphical representation is a decreasing curve, as the relationship between quantity demanded and price is inverse. We can also reflect this relationship through an analytical expression instead of a table.
Supply is the amount of a good or service that a producer or trader is willing to sell at a certain price. a) The sum of the individual bids constitutes the market supply. b) Supply measures desired amounts at certain prices.
Factors involved in supply:
- a) Price of the goods: The higher the price, the greater the quantity supplied.
- b) Price of related goods: If the prices of these goods increase without increasing the price of the goods we are considering, the supply of this good will decrease because the supply of other, more expensive goods will become more attractive, leading suppliers to shift their focus toward those other goods.
- c) The price of production factors: When the price of a productive factor increases, the supply of the good in which it is involved decreases. The relationship between supply and the price of inputs used is inverse.
- d) State of technology: Technological advancements can lead to an increase in the supply of goods and services, allowing for a greater quantity of goods and productive services to be produced with the same amount of resources. The relationship between supply and technological advancement is direct.
- e) Business objectives: Supply is undertaken by entrepreneurs. Corporate policies can sometimes flood the market with products, depending on the objectives of market supply, which can either increase or decrease.
The supply curve of a good is the graphic representation of the quantities that producers are willing to offer at various prices, assuming all other factors affecting the quantity supplied remain constant. Individual supply curve: This is when we represent the quantities and prices for a single supplier, and we have a market supply curve when we represent the group of suppliers of a specific good. In both cases, the curve will be increasing, as the relationship between price and quantity supplied is direct.
The market equilibrium is the point at which there is agreement between the amounts offered and demanded. When the quantities supplied and demanded coincide at a certain price, a balanced market is achieved. The price at which this coincidence occurs is called the equilibrium price.