Understanding Market Forces: Origins, Pillars, Equilibrium, and Elasticity

Posted on Nov 24, 2024 in Economy

Item 4: The Market and Its Forces

1. What are Markets and Why Do They Exist?

Markets originate when individuals or groups produce more than they need and interact with others to exchange goods and services. A market is the means by which those who wish to acquire a particular good connect with those who want to sell it.

  • From Barter to Money and Prices:
    • The first form of trade was barter, the exchange of goods and services without money.
    • Barter had limitations, leading to the emergence of money as a facilitator of trade.
    • Price is the value of a good or service measured in currency.
    • Using money allows for independent purchase transactions, fostering market development and trade.
  • The 3 Pillars of a Market:
    • Bidders: Those who want to buy.
    • Sellers: Those who want to sell.
    • Prices: The value assigned to goods and services, enabling trade.
  • Prerequisites for a Market:
    • A free market where individuals can buy and sell at will.
    • Recognition of private ownership of goods and factors of production.
    • Laws regulating sales and economic transactions, ensuring compliance.

2. How Markets Address the Three Economic Questions

Markets produce goods and services based on public demand. Producers aim to sell at prices higher than production costs, striving for efficiency. Production focuses on groups willing and able to pay.

3. Demand

Demand refers to applicants intending to buy with serious intentions. Factors influencing quantity demanded include:

  • The price of the good.
  • The price of related goods.
  • Tastes and fashion trends.
  • Consumer income (normal goods vs. inferior goods).

The demand function indicates the quantity of a good or service consumers are willing to buy at each price level. The quantity demanded is the amount consumers are willing to buy at a specific price.

Variations According to Demand: Changes in production factors shift the supply curve, affecting demand.

4. Market Equilibrium

Market equilibrium is the price and quantity where the wishes of buyers and sellers match.

  • Characteristics of Market Equilibrium:
    • Equilibrium is maintained unless factors affecting demand or supply change.
    • At the equilibrium price, consumers buy exactly what they want, and producers sell exactly what they intend to sell.
  • Excess Supply: Occurs when the price is above equilibrium, leading to unsold products.
  • Excess Demand (Shortage): Occurs when the price is below equilibrium, leading to stock depletion.

5. Elasticity

Factors Influencing Price Elasticity of Demand:

  1. Availability of substitutes: More substitutes lead to higher elasticity.
  2. Time horizon: Demand is inelastic in the short term but more elastic over time as alternatives emerge.
  3. Price relative to income: Cheaper goods have lower price elasticity.
  4. Necessity vs. luxury: Necessary goods have inelastic demand, while luxury goods have elastic demand.