Understanding Market Dynamics: Supply, Demand, and Equilibrium

Posted on Dec 19, 2024 in Economy

Understanding Market Dynamics

The market is a set of offers of certain goods or services that are accompanied by their respective demands. These are 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 applicants (buyers) and sellers or suppliers.

Two Types of Markets

• Market for goods and services: The applicants are the families, and the bidders are businesses.
• Factor market: The applicants are the bidders are businesses, and families. Providing families have factors (natural resources, their capital, and their ability to work) for the companies in exchange for money.

The Demand

The demand for a commodity is the amount of those assets that an applicant would be willing to buy at a specified price during a specified period. The sum of individual demands is the market demand. The demand is the desired amount and represents an intention to buy, which does not have to match what drives consumer purchases.

Factors Affecting Demand

1. Price of good: The higher the price, the lower the quantity demanded. The relation of the demand for a commodity with its price is inverse.
2. The applicant’s income level: The relationship is usually direct, as the quantity demanded of a good rises as do the income levels.

• Normal goods: When a consumer’s income increases, the quantity demanded increases.
• Inferior goods: Demand decreases with increasing income.

In normal goods, there are two types:

• Staple goods are those whose demand is growing at a rate lower than income growth.

Prices of other related items: These primarily influence the demand for a particular good.

• Complementary goods: Demand decreases when both goods must be used together to satisfy a need. For example, a decrease in gasoline demand occurs when the price of vehicles increases.
• Substitute goods: When the price of a good increases, the demand for its replacement rises because they are used alternately to meet the same need. For example, cinema and nightclubs are substitute goods.

Consumer preferences: When consumers shift their preferences to certain goods, demand increases. The relation between demand and consumer tastes is direct: two variables move in the same direction. The preferences are derived from the satisfaction she gets from consuming the good.

In short, these factors affect the quantity demanded of a good.

The Demand Curve

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 applicant, we will have one individual demand curve. If we get a collective demand curve of a market, in both cases, the graphical representation is a decreasing curve because the relationship between quantity demanded and price is inverse. We can also reflect the relationship between the quantity demanded of a good and its price by an analytical expression instead of a table.

Supply

Supply is the amount of a good or service that a producer or trader is willing to sell at a certain price.

• The sum of the individual bids makes up the market supply.
• Supply measures desired amounts at certain prices.

Factors Involved in the Offer

1. Price of the goods: The higher the price, the greater the quantity supplied.
2. Price of related goods: If the prices of these goods increased without increasing the price of the goods that we are considering, the offer of this will decrease because the supply of other goods, comparatively more expensive, will be more attractive. Hopefully, suppliers of good will move their focus toward those other assets that have risen in price.
3. The price of production factors: When the price of a productive factor increases, the supply of the good in which it intervenes decreases. The relationship between supply and the price of inputs used is reversed.
4. State of Technology: Technological advancement provides a supply growth of goods and services and represents a greater quantity of goods and productive services with the use of the same amount of resources. The supply relationship with technological advancement is direct.
5. Business objectives: The supply is undertaken by entrepreneurs. Corporate politics can sometimes flood the market with a product. Depending on the objectives, market supply is increased or decreased.

The Supply Curve

The supply curve of a good is the graphic representation of quantities of the same producers are willing to offer at various prices, assuming all other factors affecting the quantity supplied remain constant. The curve will be individual when we represent the quantities and prices for a single bidder, and we have a market supply curve if we represent the group of suppliers of goods. In both cases, the curve will be increasing as the relationship between price and quantity supplied is direct. Only positive values can be given.

The Market Equilibrium

The market equilibrium is one in which there is agreement between the amounts offered and demanded. When there is a coincidence between the quantities supplied and demanded for a certain price, a balanced market has been achieved, going from desire to reality. The price at which such coincidence occurs is called the equilibrium price.