Market Demand, Market Supply and Market
Equilibrium
Demand and Supply
“If our needs and wants can be backed by our buying power, it becomes demand. It means that
we have the ability and the willingness to buy the product at a given price within a given time period. On
other hand, the supply refers to the quantity of goods and services that firms are ready and willing to sell
at a given price within a period”
(Viray and Avila-Bato 2018).
The Law of Demand and Supply
The law of demand states that: all other things remain constant (Ceteris Paribus),
the higher the price of a good the lesser the demand for that good and the lesser the
price the higher the demand.
The law of supply states that the quantity of products offered to be sold is directly
related with the price. It means that when the price increases the quantity supplied
increases too and if the price decreases the quantity supplied decreases too.
Analyzing Demand
The demand can be analyzed using:
A. Demand Schedule –a table that shows the price of a good and the quantity
demanded for that good at a given price within a given period.
B. Demand Curve – a graphical representation that shows the relationship between
the price of a good and the quantity demanded for that good at a given price. It
usually uses the information in the demand schedule.
Analyzing Supply
The supply can be analyzed using:
A. Supply Schedule - table that shows the prices of a good and the quantity
supplied at each price at a given point of time
B. Supply Curve - a graphical representation that shows the relationship between
the price of a good and the quantity supplied at a given point of time.
Market Equilibrium
QUANTITY DEMANDED = QUANTITY SUPPLIED
As stated in the law and supply and demand, market equilibrium happens when
there is an equal demand and supply causing the price to remain the same. When
the supply is greater than the demand it causes the price to decrease but when the
demand is greater than the supply the price increases.
Market Pricing
In economics, the terms elasticity is used to define the change in behavior of
the sellers or buyers because of the change in price and/or other determinants of
supply and demand. It measures how the sellers or buyers respond to the changes
in determinants mainly the price.
Elasticity of Demand and Supply
The degree of elasticity of different products vary for several reasons. For the
customers and suppliers, the common determinant of the quantity demanded and
supplied is the price.
Price Elasticity of Demand and Supply
Price Elasticity of Demand
Price elasticity of demand measures the change in demand in response to the
change in price. For example, the price of pork increases by 5 % the price elasticity
will be determined by identifying the percentage of decrease or increase in demand
due to the change in price.
To
compute the price elasticity (ep) of demand the formula is:
ep = Percentage change in quantity demanded
Percentage change in price
= (Q2 – Q1)/Q1
(P2 – P1)/P1
Where:
Q1 = the original quantity demanded
Q2 = the new quantity demanded
P1 = the original price
P2 = the new price
Types of Elasticity
A. Elastic - The percentage change in quantity demanded is greater than the
percentage change in price. It has more than 1 elasticity coefficient. It means that if
the price will increase there is a greater possibility that the consumer will not buy
the product or may decrease the quantity of the product to buy.
B. Inelastic - The percentage
change in quantity
demanded is lesser than the
percentage change in price. It
has less than 1 elasticity coefficient. It means that the decision of the consumer to
buy the product is not that affected by the increase or decrease in price. The seller
cannot assume that the consumer will buy more if they will decrease the price
since the change in quantity demanded is only minimal.
C. Unitary - The percentage change in price is equal to the percentage change in
quantity demanded. The elasticity coefficient is 1. It means that if the price
increase by 1 % the demand will decrease by 1 % also and vice versa.
D. Perfectly elastic - When at the same price, the change of demand is infinite. It
means that a small change in
price may cause a huge
change in demand.
E. Perfectly inelastic - When there is no change in demand despite of the changes
in price. Elasticity coefficient is zero. It means that the demand is not affected by
price at all. The demand will still be the same even if there is an increase or
decrease in price.
Price Elasticity of Supply
Price is the main determinant of supply. Its elasticity describes how the
producer or seller reacts or respond to the change in price.
To compute the price elasticity (ep) of supply the formula is:
ep = Percentage change in quantity supplied
Percentage change in price
= (Qs2 – Qs1)/Qs1
(P2 – P1)/P1
Where:
Qs1 = the original quantity supplied
Qs2 = the new quantity supplied
P1 = the original price
P2 = the new price
Various Market Structures
Market Structures- A market is one of the numerous infrastructures, systems,
institutions, social relations, and procedures, wherein buyers and sellers usually
interact with each other to exchange goods and services. In relation to that, this
lesson will enlighten you of the different market structures that distinguish an
economy.
Market structures are the key points in evaluating business’ economic
environments. It deals with strategic decision making and focuses on both
economics and marketing, making professional entrepreneurs precisely judge
industry, policy changes, and market news. The significant operational definition
of market structure is a concern to both economists and marketers since they have
different methodological approaches in this, and each of them has their strengths
and weaknesses.
Moreover, these are the most notable characteristics of market structures:
• The relationship between a seller to another seller, a seller to his/her buyer, and
many more.
• The product that has been sold and the extent of product differentiation, which
affects cross-price elasticity of demand.
• The number of companies or corporations, including the scale and range of
international competition, in the market.
• The concerns in entering and exiting the market.
• The dissemination of market shares for the largest firms.
• The number of buyers and how they behave to mandate a product’s price and
quantity.
• The turnover of customers which can be affected by the extent of consumer or
brand loyalty and the influence of persuasive advertising and marketing.
The interactions and variations in these aspects provided the existence of different
market structures, which are the following:
• Monopoly. Herein, there is a single merchant of a product for which there is no
close alternative.
• Monopolistic Competition in which differentiated product has many vendors.
• Perfect Competition, wherein, a similar product has many sellers.
• Oligopoly, whereupon, there are few sellers of a standardized or a differentiated
product.
