3. Law of demand, law of supply. Market equilibrium
Demand - quantity economic benefits ( Q ) that consumers want to buy at a given price ( P ). Demand can be nominal (needs of buyers) and solvent (based on their income). Demand increase factors:· growth in consumer income;
· improving product quality and reducing its price.
Law of demand: ceteris paribus, the quantity demanded
is inversely related to the price level. The higher the price level, the lower the quantity demanded.
income effectAt a lower price, the consumer will buy more of the good without reducing the volume.
substitution effect - at a lower price, the buyer will buy more cheap goods, replacing more expensive goods with them.
Elasticity- the ability of supply and demand to remain constant with changes in price, income of buyers and other factors.
ED =ΔQ /ΔP - coefficient of elasticity(minus ignored)
Cross elasticity shows how much the demand for product X will change when the price of product Y changes. If the demand for product X increases with an increase in the price of product Y, then we are talking about interchangeable goods (substitute goods). If an increase in the price of good Y leads to a decrease in the demand for good X, then we are dealing with complementary goods.
The elasticity of demand with respect to income. In modern economics, the income elasticity of demand is also used, which shows how much the demand for a product will change under the influence of a change in the consumer's income.
The demand elasticity frontier for price elasticity is:
· Elastic - if even with a slight decrease in price, the quantity demanded increases to a greater extent (Δ P<Δ Q ). ED >1. (fig.1)
· Inelastic - if even with a very significant price reduction, the volume of demand increases slightly (Δ P >ΔQ ), ED<1. (рис.2)
· unit elasticity - the demand for a product will increase by the same percentage as the price decreases (Δ P =ΔQ ), ED =1. (fig.3)
· Perfectly inelastic demand - any change in price has little or no effect on demand (price is constant) ED =0 (fig.4)
· perfectly elastic demand - demand changes regardless of price (price is constant) ED =∞ (fig.4)
The price elasticity of demand is influenced by the following factors:
· Availability of substitutes. The more substitute products, the more elastic the demand for this product.
· Time factor. In the short run, demand is less elastic than in the long run, because buyers need time to find replacement products.
· The share of goods in the budget of the consumer (usually, the higher the share, the higher the price elasticity of demand).
· The importance of the product. As a rule, the demand for essential goods is inelastic, and the demand for all other groups of goods is more elastic.
Law of supply : with an increase in the price of a product, the volume of supply of this product increases, all other things being equal (direct connection). If the demand for a given commodity increases, it becomes rarer and its price rises. Therefore, its production becomes more profitable. The quantity supplied increases because rising profits will stimulate an increase in production. Variants of supply elasticity.
· If supply is elastic, then the change in the quantity supplied is greater than the change in the price level that caused it.
· If supply is inelastic, the price changes more than the quantity supplied.
· With unit elasticity of supply, the price level and quantity supplied change in the same way.
In addition, the elasticity of supply can also take extreme values - absolutely elastic and absolutely inelastic supply.
The following factors affect the price elasticity of supply:
· the amount of costs and the possibility of storing products. If there are opportunities to store products to a better position in the market, then the supply is elastic, and vice versa;
· flexibility of production systems. If the seller can quickly respond with an increase in the quantity of goods to a relatively small change in price, then the supply is elastic;
· cost and availability of resources. If the incremental costs of production are high, then supply tends to be inelastic with respect to price, and vice versa, if additional units of goods can be produced at the same cost, then supply is elastic;
· However, the factor of time is of the utmost importance for the elasticity of supply; the period during which producers have the opportunity to adjust the volume of supply to a change in price. There are three time intervals:
An instantaneous market period that is so short that producers do not have time to respond to changes in demand and price. Because there is no time for such a reaction, supply is perfectly inelastic;
The short-term period when production capacity remains unchanged, but the intensity of their use may change. The degree of elasticity of supply is low - by increasing the load on existing capacities, only a limited increase in production can be obtained;
A long-term period sufficient for changing production capacities, organizing new enterprises. In the long run, with a favorable change in demand, there are almost no limits to increasing supply. Therefore, the curve is very elastic.
Market equilibrium- such a ratio of supply and demand, in which the quantity of goods that they want to buy at a given price and at a given moment corresponds to the volume of supply of a given economic good that producers are ready to sell at a given price and at a given moment.Market equilibrium price is the price at which supply and demand are equal. The equilibrium volume of production is the volume of production that ensures the equality of supply and demand. imbalance:
According to the law of equilibrium: MV=PQ
where M - money in circulation V - circulation speed, P - average prices for goods and services, Q - the volume of production, i.e. GDP.
Thus, when real output falls, inflation is faster for any given amount of money in circulation and velocity of circulation. In other words, all manipulations with money, securities, etc. practically do not affect the growth and decline in prices. And vice versa, it is possible to really reduce prices, and consequently, inflation, only through a sharp increase in commodity production.
Terminology
Demand- one of the sides of market pricing reflects the desire to purchase a certain amount of goods at a given price.
Law of demand- ceteris paribus, an increase in price causes a decrease in the quantity demanded; price decrease - an increase in the quantity demanded, that is, it reflects an inverse relationship between price and quantity of goods.
Non-price factors affecting demand:
1. The level of income in society.
2. Market size.
3. Fashion, seasonality.
4. Availability of substitute goods (substitutes)
5. Inflation expectations
Offer- reflects the desire of producers to introduce a certain amount of goods to the market at a given price.
Law of supply- ceteris paribus, an increase in price leads to an increase in the supply; price reduction - to reduce the supply.
Factors affecting the offer:
1. Availability of substitute products.
2. Availability of complementary goods (complementary).
3. The level of technology.
4. Volume and availability of resources.
5. Taxes and subsidies.
6. Natural conditions
7. Expectations (inflationary, socio-political)
8. Market size
Description
market economy can be seen as an endless interaction of supply and demand, where supply reflects the quantity of goods that sellers are willing to offer for sale at a given price at a given time.
Law of supply- an economic law according to which the value of the supply of goods on the market increases with an increase in its price, all other things being equal (production costs, inflationary expectations, product quality).
In essence, the law of supply expresses the category that more goods are offered at high prices than at low prices. If we represent the supply as a function of price from the quantity of goods offered, the law of supply characterizes the increase in the supply function over the entire domain of definition.
Examples
Food
In order to circumvent the law of supply and demand in the European Union, overproduction of butter is stored in warehouses, on the so-called "mountain of butter" (it. Butterberg). Thus, there is an artificial containment of supply and the price remains stable.)
Stocks, currency, financial pyramids
Links
Supply and Demand
Wikimedia Foundation. 2010 .
See what the "Law of Demand" is in other dictionaries:
An economic law according to which an increase in prices leads to a decrease in the magnitude of demand for goods, all other things being equal, i.e. the demand for goods and the level of prices for them are inversely proportional. Business vocabulary ... ... Glossary of business terms
An economic law proposed by the British economist A. Marshall, according to which the magnitude of demand for a product or service over a certain period of time is inversely proportional to the magnitude of its price. Dictionary of business terms. Akademik.ru… … Glossary of business terms
The law according to which an increase in prices leads to a decrease in the quantity demanded for goods, other things being equal. Raizberg B.A., Lozovsky L.Sh., Starodubtseva E.B. Modern economic dictionary. 2nd ed., rev. M .: INFRA M. 479 s .. 1999 ... Economic dictionary
“Other things being equal” is a very important part of the wording. We can say with some certainty that there will be more demand for a good when its price falls if (and only if) we assume that other factors do not change.
There is a negative, or inverse, relationship between price and quantity demanded.
The inverse relationship between the price of a product and the magnitude of demand can be depicted as a graph showing the magnitude of demand on the horizontal (Q), and the price on the vertical axis (P) (Fig. 1). The downward direction of the demand curve means that people buy more of a product at a low price than at a high one.
The demand curve D shows how much consumers are willing to buy at each price. The curve goes down because the consumer generally prefers to buy more if the price is lower. For example, a lower price will allow buyers who purchase a product to buy even more and enable consumers who previously could not afford to buy the product.
WHAT DEPENDS ON THE CHANGE OF DEMAND?
The fundamental property of the law of demand is as follows: with all other parameters unchanged, a decrease in price leads to a corresponding increase in the quantity demanded.
Conversely, ceteris paribus, an increase in price leads to a corresponding decrease in the quantity demanded.
However, there are other factors that influence purchases. They are called non-price factors of changes in demand. These include:
1. Consumer tastes. The appearance of a new product often leads to a change in demand for other goods. For example, the advent of CDs has led to a reduction in the demand for records.
Rice. 1. Individual demand curve
2. Number of buyers. An increase in the number of buyers in the market causes an increase in demand, and a decrease in their number - a decrease in demand.
3. Consumer income. When incomes rise, consumers tend to buy more goods. And vice versa.
4. Related Products. When two products are interchangeable, there is a direct relationship between the price of one and the demand for the other. This is the case with sugar and its substitute, tea and coffee, and so on. When two goods are complementary, there is an inverse relationship between the price of one and the demand for the other. For example, the demand for gasoline and motor oil are conjugated - these are goods that complement each other. Many pairs of goods are not related at all. These are independent products. For such pairs of goods, such as bananas and watches, a change in price can be considered to have very little or no effect on the price of the other good.
5. Consumer expectations about future prices and earnings. Consumer expectations about factors such as future commodity prices, product availability, and future income can change demand. Consumers' expectations of the possibility of higher prices in the future may encourage them to buy now in order to "anticipate" threatening price increases; conversely, the expectation of falling prices and falling incomes leads to a reduction in the current demand for goods.
A change in the magnitude of demand under the influence of non-price factors of demand means that the demand curve changes its position either to the right (an increase in demand) or to the left (a decrease in demand).
ELASTICITY OF DEMAND AND ITS SIGNIFICANCE FOR CONSUMERS
Economists measure the response (sensitivity) of consumers to changes in the price of a product using the concept of price elasticity of demand.
The elasticity of demand is the response of the quantity demanded to a change in price.
The elasticity of demand (Ed) is measured as the ratio of the percentage change in quantity demanded to the percentage change in price:
Demand is called elastic when a slight change in price has a significant impact on the quantity demanded.
For example, if a 2% price decrease leads to a 4% increase in demand, then demand is elastic. With elastic demand, the elasticity coefficient will always be greater than one, i.e. Ed > 1. In this case it is equal to 4/2=2.
Demand is inelastic when the percentage change in demand is less than the percentage change in price. If a 3% price decrease results in a 1% increase in quantity demanded, then demand is inelastic. With inelastic demand, the elasticity coefficient will always be less than one, i.e. Ed > 1. In this case, it will be 1/3.
Demand can be unit elastic when the percentage application of price and the subsequent percentage change in quantity are equal in magnitude.
THE CONCEPT OF THE OFFER. LAW OF SUPPLY. SUPPLY CURVE
Supply refers to the desire of producers to produce and sell certain goods and services at a certain price.
Firms will produce only those goods and services, the income from which will not only cover costs, but also make a profit. No one will produce goods and services just because people need them. Owners of capital care little about this.
Supply quantity is the amount of a product that is offered for sale at a certain price during a certain period of time.
The law of supply states that there is a direct relationship between price and quantity supplied.
The Law of Supply shows that manufacturers want to make and sell more of their product at a high price than they would like to do at a low price.
As with the law of demand, let's represent the law of supply in a graphical representation (Fig. 2). The plotting technique is the same as described above, but, of course, the quantitative data and the relationships that arise between them are different.
The shape of the supply curve S is determined by the desire of firms to maximize profits.
The supply curve S shows how much and at what price producers can sell in the market. The curve rises because the higher the price, the more firms are able to produce and sell the good.
WHAT DEPENDS ON THE MODIFICATION OF THE OFFER?
The change in supply, like the change in demand, depends on the price. But the quantity supplied is greater at high prices and less at low prices. And the quantity demanded is greater at low prices and less at high prices.
If the price of a given commodity increases, then its production becomes more profitable. Rising profits will stimulate the growth of production and attract other firms into this industry.
The fundamental property of the law of supply is this: as prices rise, so does the quantity supplied. Conversely, as prices fall, supply decreases.
Non-price supply factors include:
Figure 2. Supply curve
1. Resource prices. The firm's supply is based on production costs. Here the following pattern operates: a decrease in resource prices reduces production costs and increases supply, that is, it shifts the supply curve to the right. Conversely, an increase in resource prices will increase production costs and reduce supply, i.e., shift the supply curve to the left.
2. Technology. Improvement in technology means that the discovery of new knowledge makes it possible to produce a unit of output more efficiently, i.e., with less expenditure of resources.
3. Taxes and subsidies. Businesses treat most taxes as costs of production. Therefore, raising taxes on, say, sales or property increases the cost of production and reduces supply. On the contrary, subsidies are considered a "tax in reverse". When the state subsidizes the production of a good, it actually reduces costs and increases its supply.
4. Prices for other goods. Changes in the prices of other goods can also shift the supply curve of a product. A decrease in the price of wheat may encourage a farmer to grow and sell more corn at every possible price. Conversely, an increase in the price of wheat may force farmers to reduce production and supply of corn. A sporting goods firm may cut the supply of basketballs when the price of footballs rises.
5. expectations. Expectations of changes in the price of a product in the future can also influence a manufacturer's willingness to bring the product to market at the present time. For example, the expectation of a significant increase in the price of a car firm's products can induce firms to increase production capacity and thus increase supply.
6. The number of sellers. The greater the number of sellers (suppliers), the greater the market supply. As more firms enter the industry, the supply curve will shift to the right. The fewer firms in the industry, the smaller the market supply. This means that as firms exit the industry, the supply curve will shift to the left.
ELASTICITY OF SUPPLY AND ITS SIGNIFICANCE FOR MANUFACTURERS
The concept of price elasticity of supply refers to the response of supply to price changes.
Its essence is as follows: if producers are sensitive to price changes, then the supply will be elastic. Conversely, if producers are insensitive to price changes, then supply will be inelastic.
We will consider the elasticity of supply in the same way as the elasticity of demand, remembering that in this case there is a direct relationship between supply and price.
To measure the elasticity of supply (Es), you can use the same formula as for determining the elasticity of demand:
1. The offer is called elastic when the percentage of change in its value is greater than the percentage of price change, i.e. if Es > 1, then the offer is elastic.
2. The offer is called inelastic when the percentage change in its value is less than the percentage change in price, i.e. if Es< 1, то предложение неэластично.
3. Unit elasticity of supply, perfectly inelastic and perfectly elastic supply.
What affects the elasticity of supply? Why is the supply of some goods elastic and others inelastic?
Supply is elastic when firms can easily and quickly change the quantity supplied of a good in response to a change in its price.
Supply is inelastic when it is not possible to quickly and easily change the volume of a product offered due to a change in its price.
THE CONCEPT OF THE EQUILIBRIUM QUANTITY OF GOODS AND THE EQUILIBRIUM PRICE
Now we can bring together the concepts of supply and demand to find out how the market determines the price of a product and the quantity that is actually bought and sold. If we bring together the supply and demand curves in one diagram, we will see that they intersect at only one point A - the equilibrium point of supply and demand, which is the market, or equilibrium, price (see Fig. 3). Only at this price is the quantity demanded equal to the quantity supplied.
Fig.3. The equilibrium price and equilibrium quantity of a product are determined by market demand and supply.
From the analysis of the figure, it can be seen that the point of intersection of the downward demand curve D and the ascending curve S shows the equilibrium price and quantity of the product. It is only at this price that the quantity produced is equal to the quantity that consumers are willing and able to buy. At the intersection point A, the quantity supplied and the quantity demanded are balanced. This is called the equilibrium price. It acts as the only stable price. The equilibrium, or market, price is set gradually. If these competitive prices did not automatically reconcile supply and demand decisions with each other, then some form of administrative control by the government would be needed to eliminate or regulate shortages or surpluses that might otherwise occur.
objectively determines the meaning of any production. Without taking into account the law of demand, production is not only meaningless, but also untenable. Its fundamental property is as follows: with all other parameters unchanged, a decrease in price leads to a corresponding increase in the magnitude of demand for products. Conversely, an increase in price leads to a corresponding decrease in the quantity demanded. This law is also explained by the income and substitution effects, which come down to the fact that consumers have an interest and ability to purchase more products at low prices and replace them with more expensive types. An increase (or decrease) in demand is determined by the following determinants: an indicator of the favorableness of consumer preferences, a set of consumers in the market, consumer profitability, prices for data and related products, expectation of a change economic situation, the conjuncture of the moment, macroeconomic measures to stabilize market relations, the possibilities of using the purchased products, the quality and consumer value of the products, the functionality of the intended use and the safety of the products. The most important determinant influencing the change in demand is the supply of products. Hence, demand is the desire of the consumer regarding the acquisition of goods. Without the presence of demand, its study and evaluation, production is hypothetical. It cannot guarantee reimbursement of costs, much less the receipt of expected income. True, in modern conditions When diversification processes are actively developing and many new types of goods and services appear, demand has to be formed and created. It is possible to attract consumers only through the formation of interest and demand. Therefore, in any case, demand dominates and should dominate. Through interest and demand, it is possible to regulate the production and sale of goods, the balance of the consumer market. By means of demand, it is possible to predict the income of commodity producers and suppliers. In this regard, demand must be balanced with consumer value and product availability.