Interaction of market demand and market supply. Market Equilibrium

A market is a competitive form that links economic entities. Market mechanism is the mechanism of mutual relations and actions of the main elements of the market, which include demand, supply, price, competition, the main elements of market laws. The mechanism of the market satisfies only those needs of society that are expressed through demand. The interaction of market demand and market supply is the main component of the relationship between buyers and sellers, as well as between consumers and producers.

What is demand?

Demand is the solvent demand for a certain product or service.

The magnitude of demand is the number of products, as well as the services that customers are willing to purchase at a given time, at a given location and at fixed prices.

The need for some good presupposes the desire to possess a commodity. Demand implies not only this desire, but also the opportunity to purchase at prices that are set on the market.

Types of supply and demand:

• market;
• individual;
• industrial;
• consumer.

Demand and supply for goods are determined by a variety of factors, both price and non-price. Consider them all.

Factors that affect demand:

• advertising;
• Availability of products;
• The usefulness of the goods;
• Fashion and taste preferences;
• Consumers' expectations;
• The amount of income;
• Natural conditions;
• Political situation in the state;
• Changing preferences;
• The price that is set for interchangeable products;
• Number of population.

The price of demand is the highest price that a buyer can pay for a product or service.

Demand can be exogenous and endogenous. The first is a type of demand, which is influenced by external factors or government intervention. Endogenous is also called internal demand, its feature is that it is formed inside the society.

Demand is the request of existing or potential buyers, as well as groups of consumers of products in accordance with their monetary capacity for a particular purchase. The need for these or other products is a reflection of market demand.

The nature of the law of demand is uncomplicated. In other words, the higher the price of a product, the less a consumer can afford, and vice versa (based on the same amount of money). However, in practice, everything is slightly more complicated: first, the buyer can replace the goods (this is called the substitute commodity); secondly, he can add money to buy a certain number of products.

The law of demand

The law of supply and demand is an economic law that determines the extent to which the volume of demand and the volume of supply of products depend on their prices. Alfred Marshall finally formulated this law in 1890.

When the price of certain products increases, but other parameters remain the same as before, the demand will begin to be presented for a smaller number of products.

The interaction of supply and demand in the market sets prices for products.

Elasticity of demand - what is it?

This concept denotes an indicator that expresses fluctuations in demand in the aggregate. These fluctuations are often caused by changes in the pricing policy for a product or service. Elastic demand is one that was formed with the condition that the change in volume (in percentages) exceeds the decrease in prices.

In the event that the rate of decline in prices and the increase in demand (also in percentage terms) are the same, in other words, the growth in the volume of demand is able only to compensate for the drop in prices, the elasticity is equated to unity.

In another case, if the fall in prices exceeds demand, demand is inelastic.

Hence the conclusion: the elasticity of demand is an economic term that characterizes the consumer's sensitivity to changes in product prices. This phenomenon also depends on the income of the population. Hence the classification of elasticity: by price and by income.

The reaction of buyers to the variability of prices is strong, neutral and weak, each of which creates a separate type of demand: elastic, inelastic and completely inelastic.

There are a number of products with different elasticities for the price. Goods such as bread and salt are the most successful examples of inelastic demand. Here, neither increase nor decrease in prices for this product does not affect the number of consumers.

Sellers and manufacturers use the concept of elasticity for their own purposes. If the indicator is high enough, then they are going to a sharp drop in prices in order to increase sales. Accordingly, they receive more profits than if prices were higher.

For products that have a low level of elasticity, it is impossible to go to lower prices and increase production. In this case there is no economic benefit.

When there are a large number of sellers on the market, the demand for any product is elastic. Therefore, in case of price increases, some buyers buy goods from others.

Demand curve

The demand curve is designed to show the quantity of products that can be sold for a given time at a given price. The higher the level of elasticity of demand, the higher the price.

The demand curve is a graph that illustrates the relationship between the number of consumers who want to purchase a product and the price set for it.

The demand curve is shown in summary for all buyers, but with each taken separately. Sometimes this graph is not presented in the form of a curve, but, for example, in the form of straight lines. It depends on the situation on the market.

Often, the demand curve is considered in conjunction with the supply curve: this gives the completeness of the picture. The schedule is able to fully characterize the situation on the market. The curve of supply and demand at the intersection gives the market an equilibrium price. This, in turn, regulates and stabilizes the relationship between sellers and buyers.

What is a proposal?

The interaction of supply and demand is an inalienable process of the economy, which is characteristic for all developing countries of the world.

It is impossible to objectively analyze a market mechanism without a proposal. It is it that characterizes the economic situation in the market from sellers, not buyers.

A proposal is a set of products and services on the market that are sold at a given price.

The quantity of the offer is the number of products, services that sellers offer at a given time at this price, but the size of the offer is not always equal to the volume of production or sales.

The price of the offer is the approximate minimum price at which the seller is ready to give his goods.

The economic situation in the market can be characterized by the volume and structure of the proposal. They also affect production and price policy. All goods that are on the shelves of sellers, and even those that are still on the road, refer to the commodity offer.

The volume of the offer is directly related to the price. In the event that the price is low, a smaller part of the goods are sold (most remain in warehouses), but if the price reaches the maximum level, then the product appears much more. In this case, even defective goods are used.

There are three intervals on which the proposal is examined. Up to a year is a short-term one, from a year to five it is a medium-term one, and more than five years is a long-term one.

The volume of the offer is the quantity of goods that sellers want to sell per unit of time.

The law of the proposal looks like this: the volume of goods increases with the growth of prices and also decreases, if the price decreases.

The change in supply and demand is due to many factors. First of all, this is a change in the prices of this product or one that can be replaced. The volume and costs of production also influence.

The supply, like demand, has non-price factors. These include:

• Appearance of new firms on the market;
• natural disasters;
• War or other political action;
• Production costs;
• Predicted economic expectations;
• Change in prices in the market;
• Modernization of production.

Technological progress has a huge impact. It reduces production costs, accelerates and simplifies work.

The proposal is an economic phenomenon, in which the seller wants to sell their goods on the market at a set price. On it, as well as on demand, many price and non-price factors influence. Among them:

• Presence on the market of substitute products;
• Complementary goods;
• new technologies;
• Taxes and subsidies;
• The amount of resources used;
• Availability of raw materials;
• Natural conditions;
• The size of the market;
• Waiting for the product / service.

The law of supply

The volume of supply increases with the prices of products. This law is valid only if, together with prices, the volume of production of goods increases and the seller (producer) begins to receive more profit. The real economic picture is more complicated, however, these tendencies are inherent in it.

The supply determines the demand, and demand determines the supply. That was the opinion of Karl Marx. To date, his theory is also relevant. The offer is able to generate demand due to the range of products and prices that are set for it. In turn, the volume and structure of the commodity offer is determined by demand. This happens because the goods that are most consumed are in use.

The process by which a given price is established for a given product, capable of satisfying both the buyer and the seller, is the interaction of supply and demand.

Elasticity of supply

This is an indicator that reproduces the changes in supply in the aggregate, which occur in connection with an increase in prices. In the event that the increase in supply is greater than the price increase, it is characterized as elastic (the elasticity of the offer is higher than one). If the growth of supply is equal to the rise in prices, then the offer is called single, accordingly, the indices are the same. And also if the supply increase is less than the price increase, then the offer is inelastic (supply elasticity is less than one).

Whether the proposal is elastic or vice versa, depends on several factors:

• Features of product production;
• Duration of storage;
• Time spent on making;
• Hour factor.

The interaction of supply and demand helps to establish a suitable price for products, thereby determining the relationship between the consumer and the producer.

The proposal can change:

• Prices on the market (in particular for substitute goods);
• Taxes;
• Prime cost of production;
• Tastes of consumers;
• Scientific and technical achievements;
• Number of commodity producers;
• Expectations, imposed by manufacturers.

The interaction of market demand and market supply is the process by which an equilibrium price is established that satisfies both buyers and sellers.

Supply curve

The supply curve characterizes the quantity of the product, which is sold at different prices, but at a given time.

The offer graph shows the ratio of market prices to the number of products that manufacturers offer. Most of all, this cost is influenced by production costs. This allows you to produce more products to increase profits. Another factor that affects the supply schedule is technological and scientific progress. Advanced production technologies allow you to work faster and spend less raw materials, as well as human resources.

The schedule of supply and demand is needed in order to fully depict the situation on the market. It helps to understand the pricing policy, establish the necessary volume of production and make a profitable plan for producers and sellers.

In order to represent the equation of supply and demand, linear functions are necessary. You need to know two points to build them. To find them, a supply and demand curve is depicted, their dependence on the price and quantity of products. The point at the intersection of the graphs is the solution. It is usually called an equilibrium point.

The interaction of market demand and market supply is an economic process that generates the formation of a market price that satisfies the buyer and the seller.

The factors of supply and demand are those that affect their magnitude. The main thing for both indicators is the price of the product. However, there are other non-price factors.

Market equilibrium is the phenomenon in which the same level has such indicators as demand / supply. The equilibrium price is the price at which the value of these indicators is the same. In other words, the price at which the producer offers a certain quantity of goods, and the buyers buy it all. This phenomenon in the economy is extremely rare, and at this time the offer is equal to demand.

How was the law realized?

For the first time in the fourteenth century, the topic of interaction between supply and demand arose. A Muslim historian, as well as a philosopher and social thinker from Arab countries came to the conclusion that the more exclusive the product, which is also in great demand, the higher the price for it. The name of this philosopher was Ibn Khaldun, it was he who became the founder of the law on demand and supply.

Further his idea was developed in the sixteenth century in the works of the Spanish economist Juan de Matienso. He described the theory of the subjective value of goods, which leads to a distinction between the concepts of supply and demand. He also introduced the notion of "competition" to describe trading and competition in the markets. In his numerous works there are several factors that influence pricing.

How to find the levels of demand and supply

First you need to set the current price. Demand levels are found when descending the price ladder, and supply levels, on the contrary, when climbing on it. Next, you need to decide on a strong and rapid price movement. For demand - rapid growth, for supply - downgrade. Next is the source of the movement. At the demand it is below, at the offer from above. At the end, the level is drawn around the lines at the top and bottom of the graph.

Once the levels are established, the manufacturer can freely enter the market and not be afraid of the onslaught from competitors or ruin.

The interaction of market demand and market supply helps to establish prices, regulate the situation on the market and even affect the state of the economy in the country.

In a modern economy, consumers are trying to buy more goods at favorable prices. And on the other side of the barricades is a manufacturer who also wants to sell his goods at a bargain price. Thanks to researchers and economists who are engaged in the study of supply and demand, the market is able to function normally. In order to achieve balance, they analyze a huge number of factors that to some extent affect these processes.