What is a market in practical life? An ordinary person would probably identify it as a place where you can buy stuff from those who sell it. True it is. But what motivates us to buy only specific goods? Why don’t we buy goods in the enormous amounts? Why only at the specific prices? Why the prices are set anyways? And what motivates the seller to produce and sell more? These questions can hardly be answered by a regular person. For an economist will find a market to be a much more complex system with its main players – demand and supply.
No matter which form of a market we take, a grocery store, an iTunes on-line store, an auction, an international gas market, there will always be four foremost important factors – demand, supply, quantity and price. All four connected to each other and changeable due to the variations in their measurements. In order to examine independently demand and supply, we should consider a simplest version of a market where buyers’ decisions are not influenced by any other factors than price and all sellers produce standardized products.
When nothing other than price regulates the market, the curve of demand stays still. However, in a real world market the curve of demand is usually shifted to the right or to the left by a buyer’s tastes, the number of buyers in the market, the income of a buyer, the price for the related goods, substitutes or complementary ones, and the last but not the least – consumer expectations. These are the non-price determinants of demand. One crucial factor about them is that they can cause a shift in the demand curve. Although, Tucker (2010) outlines that the movement along the curve is caused only by a change in price (p. 58).
Talking about supply, taken that all other things are equal, it is also determined by the fluctuations in price. According to McConnell and Brue (2008) “Supply is a schedule or curve showing the various amounts of a product that producers are willing and able to make available for sale at each of a series of possible prices during a specific period” (p.50). Stated succinctly, supply relies on a price as much as a demand. However, if a demand works based on the inverse connection between a price and a quantity, the law of supply, as formulated by Arnold (2008), states “that as a price of a good rises, the quantity supplied of the good rises, and as the price of a good falls, the quantity supplied of a good falls. The law of supply asserts that price and quantity supplied are directly related” (p. 87).
Just like demand, supply in a real world market is influenced not only by a price, but by many other factors. These non-price determinants of supply are the matters which influence a producer of goods. They usually are the price for the resources, technology used in production, prices of other goods, expectations of a producer regarding a future demand on his goods, taxes and subsidies, and, finally, the number of sellers in a market. Just like the determinants of demand, these factors also may shift the curve of supply to the left or to the right, depending on the raise or decrease in supply they bring.
In conclusion, it should be mentioned that demand and supply never exist separately. They correlate with each other and influence each other in so many ways. The main goal for the market is to have an equilibrium price and equilibrium quantity which will make a buyer buy the goods in a set quantity and a seller want to produce them for a set price. When these conditions are met it is fair to say that a market is functioning in the most effective way with no shortages or surpluses of goods. This is a condition most desirable for an effective economy.
McConnell, C.R., Brue, S.L. (2008). Economics: Principals, Problems and Policies. New York, NY: McGraw-Hill/Irwin Inc.
Tucker, I.B., (2010). Economics for Today, Sixth Edition. Mason, OH: Cengage Learning
Arnold, R.A., (2008). Macroeconomics. Mason, OH: Cengage Learning