Understanding Market Dynamics: Supply, Demand, and Pricing
Item 3: Market Fundamentals
A market is a set of offers of certain goods or services, which are accompanied by their corresponding demands.
Demand
Demand is the amount of an asset that a potential buyer (applicant) would be willing to buy at a specified price during a certain period.
Four factors influencing demand:
- Price of the good
- Applicant’s income level
- Prices of other related goods
- Consumer preferences
The demand curve is a graphical 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.
Supply
Supply is the amount of a good or service that a producer or trader is willing to sell at a certain price.
Four factors influencing supply:
- Price of the good
- Prices of related goods
- Prices of production factors
- State of the technology/business objectives
The supply curve is a graphical representation of the quantities that producers are willing to offer at various prices, assuming all other factors affecting the quantity supplied remain constant.
Equilibrium Price
The equilibrium price is one in which there is agreement between the quantities supplied and demanded.
Demand Shifts (Causes)
- Rightward Shift (Increase):
- Increased income
- Rise in the price of a substitute good
- Fall in the price of a complementary good
- Change in consumer preferences towards the good
- Leftward Shift (Decrease):
- Decrease in income
- Reduction in the price of a substitute good
- Price increase of a complementary good
- Change in consumer preferences against the good
Supply Shifts (Causes)
- Rightward Shift (Increase):
- Decrease in prices of other related goods
- Reduction in the cost of factors of production
- Technological improvements affecting the production process or service
- Changes in the objectives of the suppliers leading to an increase in supply
- Leftward Shift (Decrease):
- Rising prices of related goods
- Increase in the cost of factors of production
- Dependence on technology
- Changes in supplier objectives
Shifts in the demand and supply curves and their impact on the equilibrium price – The effects of these variables on the quantity supplied and demanded are known as the laws of supply and demand.
Price Elasticity
The price elasticity of demand is the percentage change in quantity demanded that occurs just before a percentage change in price. (Formula would be included here).
The price elasticity of supply is the variation of the quantity of a good relative to a percentage of the price variation.
Item 4: Market Structures
Market Classifications
- Free Market: Freedom exists in transactions (legislation).
- Intervened Market: Prices, quantities traded, or both are imposed from outside the market (legislation).
- Transparent Market: Market players are strongly related and have all possible information, forming a single price (amount of information).
- Market with Frictions: Agents do not have all the information; in this case, there are different prices for the same product (quantity of information).
- Perfect Market: The merchandise is perfectly homogeneous (characteristics of the goods).
- Imperfect Market: The same merchandise is available in various models with different characteristics; the market is differentiated (characteristics of the goods).
- Normal Market: Neither buyers nor sellers have the power to intervene in the price (power).
- Forced Market: Either buyers or sellers can act on the price or quantities traded (power).
Perfect Competition
For a perfectly competitive market, the following requirements must be met:
- The goods must be uniform (perfect market).
- The market must be atomized.
- The market should be transparent.
- There must be freedom of entry and exit.
Monopoly
A monopoly is a situation of legal privilege or market failure in which, for an industry that has a product, good, resource, or differentiated service, there is a producer (monopolist) supplier that has considerable market power and is the only one in the industry that possesses it.
Oligopoly
There is an oligopoly in the market if, regardless of the number of vendors, several of them have a significant market share.