Market Dynamics: Supply, Demand, Price, and Factors

Fundamentals of Markets and Exchange

Defining Business and Market

A business is a specialized unit that coordinates the production of goods and services.

A market is a place where buyers and sellers meet to facilitate the exchange of products and services.

Key Elements of a Market

We identify three important elements in a market:

1. Sellers: Normally businesses, who produce products or services in order to sell them in exchange for money. They usually sell them to final customers, but also to other businesses.
2. Buyers: Normally families, although companies can also buy from other companies. Buyers acquire goods and services with money in order to satisfy their needs.
3. Products and Services: Goods, both tangible and intangible, that are exchanged between buyers and sellers.

Types of Markets

We identify three different markets according to the type of goods exchanged:

1. Markets of Consumer Goods: Those markets where buyers and sellers exchange physical goods that meet a specific need, which disappears once the product is consumed.
2. Markets of Industrial Products: Those markets where companies sell products to other companies that need them to produce other products.
3. Markets of Services: Those markets where buyers and sellers exchange intangible goods (e.g., El Corte Inglés, Pangea, eDreams, Rumbo).

Essential Market Functions

Market functions include:

• Ensuring the authenticity of buyers and sellers.
• Helping interaction between buyers and sellers.
• Increasing the amount of buyers and sellers, so more volume is exchanged and more competition exists, thus ensuring higher quality of goods and better prices.
• Ensuring the quality of the products and services sold.
• Ensuring the security of transactions.
• Helping to achieve cheaper costs of transactions between buyers and sellers.

Understanding Supply, Demand, and Price

Core Concepts: Supply and Demand

A market exists if there are sellers and buyers who are interested in selling and buying products or services:

• Supply: The amount of products and services offered by companies.
• Demand: The amount of buyers willing to acquire products and services.

The Role of Price and Equilibrium

Price is the result of the relationship between sellers and buyers. Equilibrium price is the one where buyers and sellers agree on the quantity and price.

Price Impact on Consumers and Businesses

Consumer Demand Relationship

For CONSUMERS, the relationship between price and demand is inverse:

• The HIGHER the price is, they will demand LESS goods.
• The LOWER the price is, they will demand MORE goods.

Business Supply Relationship

For BUSINESSES, the relationship between price and supply is direct:

• The HIGHER the price is, they will offer MORE goods.
• The LOWER the price is, they will offer LESS goods.

Market Imbalances: Excess Demand and Supply

Nevertheless, suppliers and buyers usually have different economic interests, meaning that quantities offered and demanded may not be the same. This can lead to an excess of demand or supply:

1. Excess of Demand (DEMAND > SUPPLY): Occurs when the quantity demanded exceeds the quantity supplied at a given price.
2. Excess of Supply (SUPPLY > DEMAND): Occurs when the quantity supplied exceeds the quantity demanded at a given price.

Factors Influencing Market Dynamics

Determinants of Demand

These are the factors affecting demand:

1. Price: It is the most important factor. The higher the price is, the lower the demand will be.
2. Price of Related Goods:
   • Complementary goods.
   • Substitute goods.
3. Available Income (Income): If available income increases, the demand for goods will increase as well.
4. Consumer Preferences: If a product becomes fashionable or necessary, demand will increase.

Determinants of Supply

These are the factors affecting supply:

1. Price
2. Production Costs
3. Business Expectations