The market economy is an incentive for the development of methods of production and sale of goods. This is facilitated by the desire for personal enrichment on the part of the selling side and the chance to buy many goods of different variations from the buying side. The manufacturer can earn money for himself if his product is competitive in the market (he can sell it). The buyer can buy a quality product in the market. Thus, the customer and the seller satisfy each other's needs. This article also describes the supply and demand function, the formula of which is very easy to understand.
Formula of supply and demand
The process of buying and selling itself is quite multifaceted, in some cases even unpredictable. It is being studied by many economists and marketers interested in controlling the flow of finance in the market. To understand the more complex functions that shape a market economy, it is necessary to know a few important definitions.
Demand is a good or service that will definitely be sold at a certain price anda certain period of time. If many people want to buy one type of product, then the demand for it is high. With the opposite picture, when, for example, there are few buyers for a service, we can say that there is no demand for it. Of course, these concepts are relative.
Offer - the amount of goods that manufacturers are willing to offer to the buyer.
Demand may be higher than supply or vice versa.
There is a formula for the supply price and demand price, which determines the volume of goods on the market, the demand for it, and also helps to establish economic equilibrium. It looks like this:
QD (P)=QS (P), where Q is the volume of goods, P is the price, D (demand) is demand, S (supply) is supply. This supply and demand formula can help solve many economic problems. For example, if you are going to find out the quantity of a product on the market, how profitable it will be to produce it. The volume in the supply and demand formula, which is multiplied by the price of a good, can solve a huge range of economic problems
The law of supply and demand
It is easy to guess that there is a connection between supply and demand, which economists have given the name "Demand and Supply Function", the formula of the function was discussed above. Demand and supply as a picture can be seen in the hyperbole below.
The drawing is divided into two parts - before the intersection of two lines and after it. Line D (demand) on the first part is high in relation to the y-axis (price). Line S, on the contrary, is at the bottom. Afterthe point of intersection of two lines, the situation becomes reversed.
The drawing is quite easy to understand if you take it apart with an example. Good A is very cheap on the market, and the consumer really needs it. The low price allows anyone to buy the product, the demand for it is high. And there are few producers of this product, they cannot sell it to everyone, because there are not enough resources. This creates a shortage of goods - demand is greater than supply.
Suddenly, after the N event, the price of a commodity jumped sharply. And this means that some buyers could not afford it. The demand for a product falls, but the supply stays the same. Because of this, there are surpluses that could not be sold. This is called a commodity surplus.
But the peculiarity of the market economy is its self-regulation. If demand exceeds supply, then more manufacturers move into that niche to meet it. If supply exceeds demand, then manufacturers leave the niche. The point of intersection of the two lines is the level when supply and demand are equal.
Elasticity of demand
The market economy is a bit more complex than simple supply and demand lines. It can at least reflect the elasticity of these two factors.
Elasticity of supply and demand is an indicator of fluctuations in demand, which are caused by fluctuations in the prices of certain goods and services. If the price of a good falls and then the demand for it rises, then this is elasticity.
Formula of elasticity of supply and demand
The elasticity of supply and demand is expressed informula K=Q/P, in which:
K - demand elasticity coefficient
Q - the process of changing the sales quantity
P - price change percentage
Goods can be of two types: elastic and inelastic. The difference is only in the percentage of price and quality. When the rate of price change exceeds the rate of supply and demand, then such a product is called inelastic. Suppose the price of bread has changed dramatically. It doesn't matter which way. But changes in this industry can't be catastrophic enough to have a big impact on the price tag. Therefore, bread, as it was a commodity in great demand, will remain so. The price will not greatly affect sales. That is why bread is an example of perfectly inelastic demand.
Types of elasticity of demand:
- Totally inelastic. The price changes, but the demand does not change. Examples: bread, s alt.
- Inelastic demand. Demand is changing, but not as much as price. Examples: everyday goods.
- Demand with a unit coefficient (when the result of the elasticity of demand formula is equal to one). The quantity demanded changes in proportion to the price. Examples: dishes.
- Elastic demand. Demand changes more than price. Example: luxury goods.
- Perfectly elastic demand. With the smallest change in price, demand changes very much. There are currently no such products.
Changes in demand may be the result of more than just prices for a particular product. If the income of the population rises or falls, this will entail a change in demand. That's whyelasticity of demand is better divided. There is price elasticity of demand, and there is income elasticity.
Elasticity of supply
Elasticity of supply is the change in quantity supplied in response to a change in demand or some other factor. It is formed from the same formula as the elasticity of demand.
Types of supply elasticity
Unlike demand, supply elasticity is formed according to time characteristics. Consider the offer types:
- Absolutely inelastic offers. Changing the price does not affect the quantity of the offered goods. Typical for short-term periods.
- Inelastic supply. The price of a commodity changes much more than the quantity of the commodity offered. Also possible in the short term.
- Unit elasticity supply.
- Elastic supply. The price of a good changes less than the demand for it. Characteristic for the long term.
- A perfectly flexible offer. The supply change is much bigger than the price change
Rules of price elasticity of demand
Having figured out what formulas supply and demand are given, you can delve a little more into the functioning of the market. Economists have systematized the rules that allow you to identify factors that affect the elasticity of demand. Consider them in more detail:
- Substitutes. The more types of the same product on the market, the more elastic it is. This is due to the fact thatwhen prices rise, brand A can always be replaced by brand B, which is cheaper.
- Necessity. The more necessary the product for the mass consumer, the less elastic it is. This is due to the fact that, despite the price, the demand for it will always be high.
- Specific gravity. The more space a product occupies in the structure of consumer spending, the more elastic it is. In order to better understand this point, it is worth paying attention to meat, which is a large expenditure column for most consumers. When the price of beef and bread changes, the demand for beef will change more, because it is a priori more expensive.
- Accessibility. The less available a product is on the market, the less elastic it is. When a commodity is in short supply, its elasticity will be low. As you know, manufacturers raise prices for what is in short supply, however, it is in demand.
- Saturation. The more of a particular product a population has, the more elastic it becomes. Let's say that an individual has a car. Buying the second is not a priority for him if the first satisfies all his needs.
- Time. Often, sooner or later, substitutes appear for a product, its quantity on the market grows, and so on. This means that it becomes more elastic, as proven in the points above.
The influence of the state on the elasticity of supply and demand
Demand and supply are described by formulas, if the state influences the market, the same, but with one exception. An additional denominator appears that can change price/volume. The government can influence supply and demand, respectively, on their elasticity too. There are several ways in which government can influence supply and demand:
- Protectionism. The government can raise taxes on foreign goods, thereby changing the elasticity of demand. For businessmen, business activity in a state that has raised duties on their products is less profitable. The situation is the same with buyers. An increase in duties causes an increase in the price of the product itself. Accordingly, the state affects the elasticity of demand, artificially lowering it.
- Orders. The state itself can act as a customer of certain goods, which affects the elasticity of supply.
Funding is also worth noting. When a product is in short supply, for example, the state can sponsor it to even out the supply and demand ratio.
