Market Dynamics: Understanding Supply and Demand

Market Exchange Mechanisms: Market and Money

Marketplace: A set of allowed activities for the sale and purchase of a product made to put the reach of a buyer. Money: Allows every person to specialize in specific tasks because a wage will allow them to buy other goods. Demand: Many defendants are willing to buy at a certain price.

Factors Conditioning Demand

• Price: The lower the price, the greater the product demand.
• Prices of related goods:
  • Complementary goods: Goods that are consumed jointly. An increase or decrease in price implies a variation in demand.
  • Substitute goods: Using one means leaving others that fulfill the same need.
• Disposable income or purchasing power: Determines the product quality and quantity that a consumer will demand.
• Types of Goods:
  • Inferior goods: Less is demanded when income increases because they are substituted for others of higher quality.
  • Normal goods: Demand increases in the same proportion as the income of the defendants.
  • Luxury goods: Not consumed when income is low, but their use increases with income, giving an increase in social prestige.

Consumer preferences: Tastes, preferences, and fashion vary the demand for a product.

The Demand Curve

A graphical representation of the amount of demand based on the product's price. Demand is on the X-axis and price on the Y-axis. If prices decrease, demand increases.

Supply

Supply of a good is the quantity that firms are preparing to produce.

Factors Influencing Supply

• Price of the goods: The higher the price, the more products a company will produce.
• Costs of production factors: Increased production costs mean reducing profits. Companies can pass the cost increase on to customers or stop producing if prices rise.
• Business objectives: In emerging markets, it may be convenient to maximize production and sales volume. The benefits will come when the company consolidates in the market to achieve a clientele. When part of the competition is out, other companies reconsider production volumes and sales prices.

The Supply Curve

A graph of the quantity of production offered at a given price. The variation in the quantity that companies offer depends on the price. Q0 = F (P)

Market Equilibrium

• Excess demand: At a low price, the quantity demanded by consumers is greater than the quantity of product that companies offer.
• Equilibrium point: The two curves intersect, as supply and demand are at a satisfactory price for buyers.
• Surplus: The amount of an expensive product demanded is less than the amount offered by companies. Companies then lower prices. Supply decreases and consumers are encouraged to buy.