The greater the demand, the greater the supply. Supply and demand. Market equilibrium. on the topic "Supply and Demand"

Demand. Law of Demand

Demand (D- from English demand) is the intention of consumers, secured by means of payment, to purchase a given product.

Demand is characterized by its magnitude. Under quantity of demand (Qd) It is necessary to understand the quantity of goods that the buyer is willing and able to purchase at a given price in a given period of time.

The presence of demand for a product means the buyer agrees to pay the specified price for it.

Ask price- This is the maximum price that a consumer is willing to pay when purchasing a given product.

There is a distinction between individual and aggregate demand. Individual demand is the demand in a given market of a specific buyer for a specific product. Aggregate demand is the total amount demanded for goods and services in a country.

The quantity of demand is influenced by both price and non-price factors, which can be grouped as follows:

• price of the product itself X (Px);
• prices for substitute goods (Pi);
• consumer cash income (Y);
• consumer tastes and preferences (Z);
• consumer expectations (E);
• number of consumers (N).

Then the demand function, characterizing its dependence on these factors, will look like this:

The main factor determining demand is price. A high price of a product limits the amount of demand for that product, and a decrease in price leads to an increase in the amount of demand for it. From the above it follows that the quantity demanded and the price are inversely related.

Thus, there is a relationship between the price and quantity of goods purchased, which is reflected in law of demand: ceteris paribus (other factors influencing demand are unchanged), the quantity of a good for which demand is presented increases when the price of this good falls, and vice versa.

Mathematically, the law of demand has the following form:

Where Qd- the amount of demand for any product; / – factors influencing demand; R- the price of this product.

A change in the quantity of demand for a particular product caused by an increase in its prices can be explained by the following reasons:

1. Substitution effect. If the price of a product increases, then consumers try to replace it with a similar product (for example, if the price of beef and pork rises, then the demand for poultry meat and fish increases). The substitution effect is a change in the structure of demand, which is caused by a decrease in purchases of a more expensive product and its replacement with other goods with unchanged prices, since they now become relatively cheaper, and vice versa.

2. Income effect which is expressed in the following: when the price increases, buyers seem to become a little poorer than they were before, and vice versa. For example, if the price of gasoline doubles, then as a result we will have less real income and, naturally, will reduce the consumption of gasoline and other goods. The income effect is a change in the structure of consumer demand caused by a change in income from price changes.

In some cases, certain deviations from the rigid dependence formulated by the law of demand are possible: an increase in price may be accompanied by an increase in the quantity of demand, and a decrease in price may lead to a decrease in the quantity of demand, while at the same time it is possible to maintain stable demand for expensive goods.

These deviations from the law of demand do not contradict it: rising prices can increase the demand for goods if buyers expect their further increase; lower prices may reduce demand if they are expected to fall even further in the future; the acquisition of consistently expensive goods is associated with the desire of consumers to invest their savings profitably.

Demand can be depicted as a table showing the quantity of a good that consumers are willing and able to buy during a certain period. This dependency is called demand scale.

Example. Let us have a demand scale that reflects the state of affairs on the potato market (Table 3.1).

Table 3.1. Demand for potatoes

At each market price, consumers will want to buy a certain amount of potatoes. If the price decreases, the quantity demanded will increase, and vice versa.

Based on these data, you can build demand curve.

Axis X let's put aside the quantity of demand (Q), along the axis Y- appropriate price (R). The graph shows several options for the demand for potatoes depending on their price.

Connecting these points we get the demand curve (D), having a negative slope, which indicates an inversely proportional relationship between price and quantity demanded.

Thus, the demand curve shows that, while other factors influencing demand remain constant, a decrease in price leads to an increase in the quantity demanded, and vice versa, illustrating the law of demand.

Rice. 3.1. Demand curve.

The law of demand also reveals another feature - diminishing marginal utility since the decrease in the volume of purchases of goods occurs not only due to an increase in prices, but also as a result of the saturation of the needs of buyers, since each additional unit of the same product has a less and less useful consumer effect.

Offer. Law of supply

The offer characterizes the seller’s willingness to sell a certain quantity of goods.

There are two concepts: supply and quantity supplied.

Sentence (S- supply) is the willingness of producers (sellers) to supply a certain amount of goods or services to the market at a given price.

Supply quantity- this is the maximum quantity of goods and services that producers (sellers) are able and willing to sell at a certain price, in a certain place and at a certain time.

The value of the supply must always be determined for a specific period of time (day, month, year, etc.).

Similar to demand, the quantity of supply is influenced by many price and non-price factors, among which the following can be distinguished:

• price of the product itself X(Px);
• resource prices (Pr), used in the production of goods X;
• technology level (L);
• company goals (A);
• amounts of taxes and subsidies (T);
• prices for related goods (Pi);
• Manufacturers' expectations (E);
• number of goods manufacturers (N).

Then the supply function, constructed taking into account these factors, will have the following form:

The most important factor influencing the quantity of supply is the price of the product. The income of sellers and producers depends on the level of market prices, so the higher the price of a given product, the greater the supply, and vice versa.

Offer price- this is the minimum price at which sellers agree to supply this product to the market.

Assuming that all factors except the first remain unchanged:

we get a simplified proposal function:

Where Q- the amount of supply of goods; R- the price of this product.

The relationship between supply and price is expressed in law of supply the essence of which is that The quantity supplied, other things being equal, changes in direct proportion to the change in price.

The direct response of supply to price is explained by the fact that production responds quite quickly to any changes occurring in the market: when prices increase, commodity producers use reserve capacity or introduce new ones, which leads to an increase in supply. In addition, the presence of a trend towards rising prices attracts other producers to this industry, which further increases production and supply.

It should be noted that in short term An increase in supply does not always follow immediately after an increase in price. Everything depends on the available production reserves (availability and workload of equipment, labor, etc.), since the expansion of capacity and the transfer of capital from other industries usually cannot be carried out in a short time. But in long term an increase in supply almost always follows an increase in price.

The graphical relationship between price and quantity supplied is called the supply curve S.

The supply scale and supply curve for a good shows the relationship (other things being equal) between the market price and the quantity of this good that producers want to produce and sell.

Example. Let's say we know how many tons of potatoes can be offered by sellers on the market in a week at different prices.

Table 3.2. Potato offer

This table shows how many goods will be offered at the minimum and maximum prices.

So, at a price of 5 rubles. For 1 kg of potatoes a minimum quantity will be sold. At such a low price, sellers may sell another product that is more profitable than potatoes. As the price increases, the supply of potatoes will also increase.

Based on the data in the table, a supply curve is constructed S, which shows how much of a good producers would sell at different price levels R(Fig. 3.2).

Rice. 3.2. Supply curve.

Changes in demand

A change in demand for a product occurs not only due to changes in prices for it, but also under the influence of other, so-called “non-price” factors. Let's take a closer look at these factors.

Production costs are primarily determined prices for economic resources: raw materials, materials, means of production, labor - and technical progress. Obviously, rising resource prices have a major impact on production costs and output levels. For example, when in the 1970s. Oil prices have risen sharply, leading to higher energy prices for producers, increasing their production costs and reducing their supply.

2. Production technology. This concept covers everything from genuine technical breakthroughs and better use of existing technologies to the usual reorganization of work processes. Improved technology makes it possible to produce more products with fewer resources. Technical progress also allows you to reduce the amount of resources required for the same output. For example, today manufacturers spend much less time producing one car than 10 years ago. Advances in technology allow car manufacturers to profit from producing more cars for the same price.

3. Taxes and subsidies. The effect of taxes and subsidies is manifested in different directions: increasing taxes leads to an increase in production costs, increasing the price of production and reducing its supply. Tax cuts have the opposite effect. Subsidies and subsidies make it possible to reduce production costs at the expense of the state, thereby contributing to the growth of supply.

4. Prices for related goods. Market supply largely depends on the availability of interchangeable and complementary goods on the market at reasonable prices. For example, the use of artificial raw materials, which are cheaper than natural ones, makes it possible to reduce production costs, thereby increasing the supply of goods.

5. Manufacturers' expectations. Expectations of future price changes for a product may also affect a manufacturer's willingness to supply the product to the market. For example, if a manufacturer expects prices for its products to rise, it can begin to increase production capacity today in the hope of making a profit later and hold the product until prices rise. Information about expected price reductions may lead to an increase in supply now and a decrease in supply in the future.

6. Number of commodity producers. An increase in the number of producers of a given product will lead to an increase in supply, and vice versa.

7. Special factors. For example, certain types of products (skis, roller skates, agricultural products, etc.) are greatly influenced by the weather.

1. Demand is the intention of consumers, secured by means of payment, to purchase a given product. Quantity demand is the quantity of a good that a buyer is willing and able to purchase at a given price in a given period of time. According to the law of demand, a decrease in price leads to an increase in the quantity demanded, and vice versa.

2. Supply is the willingness of producers (sellers) to supply a certain amount of goods or services to the market at a given price. Quantity supplied is the maximum quantity of goods and services that producers (sellers) are willing to sell at a certain price during a certain period of time. According to the law of supply, an increase in price leads to an increase in the quantity supplied, and vice versa.

3. Changes in demand are caused by both price factors - in this case there is a change in the quantity of demand, which is expressed by movement along the points of the demand curve (along the demand line), and non-price factors, which will lead to a change in the demand function itself. On the graph, this will be expressed by the demand curve shifting to the right if demand is rising, and to the left if demand is falling.

4. A change in the price of a given product affects a change in the supply of that product. Graphically, this can be expressed by moving along the supply line. Non-price factors influence changes in the entire supply function; this can be clearly represented in the form of a shift of the supply curve to the right - when supply increases, and to the left - when it decreases.

Supply and demand is perhaps the most fundamental concept, and it is the basis of a market economy. Demand is how much (quantity) of a product or service buyers want to purchase. Quantity demanded is the quantity of a good that people are willing to buy at a certain price. Supply shows how much of a good the market can supply. Supply volume means how much of a product producers are willing to supply at a certain price. Price is a reflection of supply and demand.

The relationship between supply and demand underlies the power behind resource allocation. In market economics theory, supply and demand allocate resources in the most efficient way. How? Let's take a closer look at the law of demand and the law of supply.

1. Law of demand.
The law of demand states that, if all other factors remain equal, the higher the price of a good, the fewer people will buy that good. In other words, the higher the price, the lower the quantity demanded. The volume of goods that buyers purchase at a higher price is small because as the price of the goods rises, the purchase becomes unattractive. As a result, people will naturally not buy a product that will force them to stop consuming other products. The graph below shows the demand curve.

A, B and C are points on the Demand curve. Each point on the curve reflects the direct relationship between quantity demanded (Quantity) and price (Price). So, at point A, the quantity demanded will be Q1 and the price will be P1, and so on. The demand curve illustrates the inverse relationship between price and quantity demanded. The higher the price of a good, the lower the quantity demanded (A), and the lower the price, the more of the good will be in demand (C).

B. Law of supply.
Like the law of demand, the law of supply demonstrates the volume of a product that will be sold at a certain price. But unlike the law of demand, the supply curve is directed upward. This means that the higher the price, the higher the quantity supplied. Manufacturers supply more at a higher price because selling more at a higher price will generate more profit.

A, B and C are points on the supply curve. Each point on the curve reflects a direct relationship between quantity supplied (Q) and price (P). At point B, the quantity supplied will be Q2 and the price will be P2, and so on.

C. Equilibrium, equilibrium price.
When supply and demand are equal (that is, when the supply and demand curves intersect) the economy is said to be in equilibrium. At this point, the distribution of goods occurs most efficiently because the amount of goods that is produced is exactly the same as the amount of goods that is consumed. Thus, everyone (individuals, firms or countries) is satisfied with the current economic situation. At a given price, suppliers sell all the goods they have produced, and consumers receive all the goods they need.

As you can see in the graph, the equilibrium point is at the intersection of the demand curve and the supply curve, indicating that there is no inefficient allocation. At this moment, the price of the product will be P * and the volume will be Q *. These indicators are called equilibrium price and equilibrium volume.

D. Imbalance
Imbalance in the economy occurs whenever price or quantity is not equal to P* and Q*.

1. oversupply
If the price is set too high, excess supply will be created in the market and distribution will be inefficient.

At price P1, the volume of goods that producers want to sell is equal to Q2. However, while the number of buyers who are willing to buy at price P1 is equal to Q1, the quantity is significantly less than Q2. Because Q2 is greater than Q1, it means that too much is being produced and too little is being consumed. Suppliers try to produce more of the goods they hope to sell in order to increase profits, but those who consume the goods will find the price of the product less attractive and will buy less because the price is too high.

Excess demand is created when the price is set below the equilibrium price. Because the price is so low, too many consumers want to buy the manufacturer's product when it is not being produced in sufficient quantities.

In this situation, at price P1, the quantity of goods demanded by buyers is equal to Q2. Conversely, the quantity of goods that producers are willing to produce at this price is Q1. Thus, there are too few products in the market to satisfy the needs (demand) of buyers. And buyers must compete with each other to buy the product at that price. Demand will push the price up, causing suppliers to want to supply more, causing the price to move closer to its equilibrium.

In a real economy, on a functioning stock exchange, equilibrium can only be achieved in theory, since prices for goods and services are constantly changing due to fluctuations in supply and demand.

To learn how you can use the imbalance of supply and demand on the stock exchange to make money from trading, register on the forum.

ABSTRACT

in the discipline "Economic Theory"

on the topic "Supply and Demand"

1. Demand and factors influencing it. Law of Demand

Demand is an economic category that characterizes the need of buyers for a certain product, provided with sufficient means of payment to purchase this product at a certain price in a given period of time in a certain market or in a certain country.

There is a distinction between individual and aggregate demand. Individual demand is the demand of a specific buyer for a specific product, and in a given market. Aggregate demand is the total amount demanded for goods and services in a country.

There is also a distinction between primary and secondary demand. Primary demand is the demand for a product or service of a certain category of goods as a whole. For example, this could be the demand for coffee or the demand for insurance services. Secondary (or selective) demand is the demand for goods of a certain brand or company and for services of a certain type.

In addition, demand can be negative, absent, hidden (potential), full, excessive, decreasing (falling), fluctuating, irrational, rush (avalanche).

Negative demand is demand that arises when consumers “dislike” a product and therefore avoid purchasing it. Missing demand is the demand for goods that are no longer needed in the market or are outdated. Latent demand is demand expected in the future, the demand of potential buyers. Full demand is the desired demand that exactly corresponds to the production capabilities and policies of the enterprise - the manufacturer of the product or service. Excessive demand is demand that exceeds the capabilities of the enterprise, when customers believe that the enterprise does not satisfy their solvent needs. Declining demand is demand that has a steady downward trend, demand for goods that are going out of fashion or that meet the needs of the market and consumers. Fluctuating demand is demand that changes over time, i.e. and depending on the season, month or even day of the week and time of day. Irrational demand is a demand that is undesirable from the moral point of view of society, for example the demand for drugs. rush demand is demand of a spontaneous nature, caused, for example, by a shortage of a product.

In addition to the concept of “demand”, it is also necessary to highlight the concept of “quantity of demand”, which means the maximum amount of a service or product that a consumer wants and can buy at a given price in a given period of time.

The amount of demand is influenced by a number of factors:

the price of the product offered;

quality characteristics of the product;

consumer income level;

changes in consumer incomes - usually an increase in consumer incomes leads to an increase in demand for goods, but not always;

changes in prices for substitute goods;

changes in prices for complementary goods;

changes in tastes, habits, fashion, preferences, needs, desires of consumers, most often associated with a temporary factor, i.e. consumer preferences and consumer expectations;

changes in the number of consumers in the market and demographic situation;

political factors;

socio-cultural factors;

market saturation;

general economic indicators - for example, the refinancing rate and interest rates on household deposits; if the rates are high, then the demand for goods may decrease due to the fact that people will prefer to accumulate money.

Demand behavior obeys the law of demand. As a rule, the most significant influence on demand is the price of a product or service. There is a certain connection between the price of a product and the quantity of the product demanded, which is reflected in the law of demand.

The law of demand states: all other things being equal (other factors influencing the quantity of demand are unchanged), the quantity of a good demanded increases as the price of this good decreases, and vice versa. Thus, the demand for goods is inversely related to price. The law of demand is based on the principles of diminishing marginal utility, the income effect, and the substitution effect.

2. Supply and factors influencing it. Law of supply

Supply is the quantity of goods presented on the market at a certain point in time at a certain price, i.e. the totality of goods that producers are willing and able to sell.

Supply, like demand, can be individual or aggregate. An individual offer is an offer from a specific manufacturer or an offer from a specific product in a given market. Aggregate supply is the total supply of all goods and services in a country.

Just as it is necessary to distinguish between the concepts of “demand” and “quantity of demand,” it is necessary to distinguish between the concepts of “supply” and “quantity of supply.” Quantity supplied is the maximum quantity of a good or service that sellers are able and willing to sell at a certain price in a certain market and at a certain time.

Factors influencing the quantity of supply can be divided into two large groups:

external factors, the influence of which does not depend on the activities of producers of goods and services:

socio-economic: consumer solvency; level of interest rates on deposits; demographic situation, etc.;

cultural and ethnic;

political: economic policy of the state, inflation rate, government subsidies and orders in a particular industry, etc.;

competition - in particular, the entry of new firms into the market or the release of new products;

the price of a product prevailing on the market.

internal factors, the influence of which can be controlled directly by producers of goods and services:

objectivity of marketing analysis of demand forecast for the enterprise’s products;

level of product competitiveness;

level of organization of the sales process and promotion of products to the market;

pricing policy of the enterprise;

the value of production costs.

The volume of supply for each specific manufacturer usually changes depending on the price of the product in the market. The dependence of supply on the price of goods is reflected in the law of supply.

The law of supply is that, other things being equal, as the price of a product increases, the volume of its supply on the market increases, and as the price decreases, supply decreases.

Thus, supply is directly dependent on price changes. If there is a low price on the market, then sellers will offer a small amount of goods, keep part of it in the enterprise’s warehouse until the price rises, and if the price is high, then they will offer the market a large volume of goods, since, firstly, sellers use reserve reserves when the price rises. or quickly introduced new capacities, and secondly, other manufacturers will rush into this industry (with a tendency to increase prices). In the short term, an increase in price is not always followed by an increase in supply, since it takes time to introduce reserves to increase production (available equipment, number of employees) and the transfer of capital from other industries. But in the long run, an increase in price is always followed by an increase in supply.

demand supply elasticity equilibrium price

3. Market equilibrium of supply and demand. Equilibrium price

Market equilibrium of supply and demand is the equality of supply and demand for a certain product at a certain time in a certain market, in other words, it is the coincidence of the plans of buyers and sellers at a certain price. Thus, market equilibrium depends on the matching of supply and demand. The following types of market equilibrium are distinguished:

stable - equilibrium, the fluctuations of which are insignificant and deviation from which leads to a return to the same state;

unstable - equilibrium, deviation from which does not lead to a return to the previous state;

instantaneous - equilibrium that is created in a situation if the demand for some product suddenly increased, but the supply remained the same;

short-term - equilibrium, which is created in a situation where the number of enterprises in a given market does not change, and supply increases slightly, but not for long;

long-term - equilibrium in which supply fully adapts to changed demand.

As a result of the interaction of supply and demand, the market price is established. If you draw graphs of changes in supply and demand depending on price, then the market price is fixed at the point of intersection of the demand and supply graphs. This point is called the equilibrium point, and the price is called the equilibrium price. The equilibrium price is the price at which the quantity demanded corresponds to the quantity supplied; it determines when the interests of the seller and the interests of the buyer reach agreement.

Other things being equal, the equilibrium price corresponds to the quantity of goods that buyers want to buy and sellers agree to sell, thus the equilibrium price has a balancing function. It reveals its influence both through demand with constant supply, and through supply with constant demand. If supply increases while demand remains constant, the equilibrium price will become lower as the quantity of goods sold increases. If supply decreases, a higher equilibrium price will be established with fewer sales of goods. Such changes in the equilibrium price occur under the influence of market mechanisms, but the market mechanism for establishing the equilibrium price may be hampered by administrative price regulation and the monopoly of the producer or consumer, which allows the monopoly price to be maintained.

Market— ϶ᴛᴏ a competitive form of communication between economic entities.

Market mechanism— ϶ᴛᴏ mechanism of interrelation and interaction of the main elements of the market - demand, supply, price, competition, and the basic economic laws of the market.

The market mechanism operates on the basis of economic laws. Changes in demand, changes in supply, changes in equilibrium price, competition, cost, utility and profit. The market mechanism makes it possible to satisfy exclusively those needs of man and society that are expressed through demand.

Law of Demand

Demand— ϶ᴛᴏ solvent need for any product or service.

Quantity of demand— ϶ᴛᴏ the quantity of goods and services that buyers are willing to purchase at a given time, in a given place, at given prices.

The need for some good implies the desire to possess goods. Demand presupposes not only desire, but also the possibility of acquiring it at existing market prices.

Types of demand:

• Individual demand
• Market demand
• Demand for factors of production (Production demand)
• Consumer demand

Factors influencing demand

The amount of demand is influenced by a huge number of factors (determinants). Demand depends on:

• use of advertising
• fashion and tastes
• consumer expectations
• changes in environmental preferences
• availability of goods
• income amounts
• usefulness of a thing
• prices established for interchangeable goods
• and also depends on the size of the population.

The maximum price that buyers are willing to pay for a certain quantity of a given good or service is called at the price of demand(denote)

Distinguish exogenous and endogenous demand.

Exogenous demand -϶ᴛᴏ such a demand, changes in which are caused by government intervention, or the introduction of any external forces.

Endogenous demand(domestic demand) - is formed within society due to those factors that exist in a given society.

The relationship between the quantity of demand and the factors that determine it is called the demand function.
In its most general form it is written as follows:

If all factors that determine the quantity of demand are considered unchanged for a given period of time, then we can move from the general demand function to price demand functions:. The graphical representation of the demand function from price on the coordinate plane is called demand curve(picture below)

Changes occurring in the market related to the quantitative supply of goods always depend on the price set for this product. There is always a certain relationship between the market price of a product and the quantity for which there will be demand. The high price of goods limits the demand for it; a decrease in the price of a product usually characterizes an increase in demand for it.

Changes in demand and quantity demanded

When analyzing market conditions, it is extremely important to make a clear distinction between demand and quantity demanded, and between changes in quantity demanded and changes in the demand for a given product.

Change in quantity demanded observed when the price of the product in question changes and all other parameters remain unchanged (tastes, income, prices for other goods). On the graph, such a change is demonstrated by movement along the demand curve from point (arrow No. 1)

Change in demand occurs when market prices for the product in question remain unchanged, i.e. under the influence of any non-price factors, and is demonstrated on the graph by a shift in the demand curve to the right or left (arrow No. 2)

Non-price determinants of demand

Factors that influence demand at constant prices for the product in question are called non-price determinants of demand. Among the most significant non-price determinants, economists identify:

1. Tastes and preferences of consumers. 2. Consumer income.

For the overwhelming group of normal quality goods, an increase in income causes an increase in demand at the same prices and a resulting shift of the demand curve to the right.

Moreover, for relatively worse goods that are of relatively lower quality, an increase in income encourages the consumer to replace the relatively worse product with a better one and thereby reduces demand. As a result, the demand curve shifts to the left.

3. Number of consumers.

All other things being equal, the greater the number of potential buyers, the higher the market demand for the product.

4. Prices for other goods.

This factor will be non-price, because assumes the price of the product in question remains unchanged. The price of any other product besides the one we are analyzing acts as a non-price or exogenous factor.

There are conventionally three groups of “other” goods:

• neutral, i.e. having an extremely low, close to zero impact on the market for the main product, for example, tea and milling machines;
• substitutes, satisfying similar needs and therefore being competitors for the main product, for example, tea and coffee;
• complementary, whose consumption is driven by the consumption of a staple good, such as tea and sugar.

If we can abstract from the first group of goods, then changes in prices for complementary and substitute goods will have a significant impact on the market demand of the analyzed product.

An increase in the price of a substitute product leads to a reduction in the quantity demanded for it and, as a consequence, to an increase in demand for the main product. (An example is the situation in the 70-80s in the oil market, when rising prices for the energy source provoked an increase in demand for alternative energy sources: nuclear, solar, wind, etc.)

On the contrary, an increase in the price of a complementary product leads to a reduction in demand for the main product, and vice versa, a fall in prices leads to its increase. Thus, the reduction in prices for printers for personal computers caused a sharp increase in demand for high-quality paper. Both examples can be illustrated by a shift in the demand curve to the left.

5. Economic expectations of consumers.

Expectations may concern changes in prices, cash income, macroeconomic situation in the country, etc. Thus, expectations of rising prices (so-called inflation expectations) can cause an increase in demand for goods already in the current period of time, which will graphically mean a shift of the demand curve to the right, and expectations of a reduction in cash income (for example, due to an upcoming layoff) - a reduction in demand and This is a significant shift of the demand curve to the left.

To non-price factors influencing demand:

• Changes in cash income of the population
• Changes in population structure and size
• Changes in the prices of other goods (especially substitute goods, or complementary goods)
• Economic policy of the state
• Changing consumer preferences under the influence of advertising and fashion.

The study of non-price factors allows us to formulate the law of demand.

Law of Demand. If prices for any product increase, and all other parameters remain unchanged, then demand will be for less and less of this product.

The operation of the law of demand can be explained on the basis of the action of two interrelated effects: the income effect and the substitution effect. The essence of these effects is as follows:

• On the one hand, a rise in prices reduces the real income of the consumer, while the amount of his monetary income remains unchanged, reduces his purchasing power, which leads to a relative reduction in the amount of demand for the more expensive product (income effect)
• On the other hand, the same increase in prices makes other goods more attractive to the consumer, encourages him to replace the more expensive product with a cheaper analogue, which again leads to a reduction in the amount of demand for it (substitution effect)

The law of demand does not apply in the following cases:

• Giffen's paradox(An increase in prices for the main group of essential goods leads to a rejection of more expensive and high-quality goods, and to an increase in the volume of demand for this basic product (can be observed during a famine) For example, during the famine in Ireland in the mid-19th century, the volume of demand for potatoes increased Giffen is associated with the fact that in the budget of poor families, expenses for potatoes occupied a significant share.Increasing prices for this product led to the fact that the real incomes of these segments of the population fell, and they were forced to reduce purchases of other goods, increasing the consumption of potatoes, to survive and not die of hunger)

• When price will be an indicator of quality(In this case, the consumer may believe that the high price of a product indicates its high quality and increased demand)

• Veblen effect(Connected with prestigious demand, focused on the acquisition of goods that, in the buyer’s opinion, indicate his high status or belonging to “beneficiary goods”)

• Effect of expected price dynamics(If the price of a product decreases and consumers expect this trend to continue, then the amount of demand in a given time period may decrease and vice versa)

• For rare and expensive goods that are a means of investing money.

Law of supply

The analysis of the market mechanism will be one-sided without considering supply, which characterizes the economic situation on the market not from the buyer's side, as demand, but from the seller's side.

Offer- ϶ᴛᴏ the totality of goods and services that are on the market, and which sellers are willing to sell to the buyer at a given price.

Supply quantity— ϶ᴛᴏ the quantity of goods and services that sellers are willing to sell at a given time, in a given place and at given prices, but the amount of supply does not always coincide with the volume of production and sales volume on the market.

Offer price— ϶ᴛᴏ the forecast minimum price at which the seller agrees to sell a certain quantity of a given product.

Volume and structure of the proposal characterizes the economic situation on the market on the part of sellers (manufacturers) and is determined by the size and capabilities of production, as well as the share of goods that are sent to the market and, under favorable economic circumstances, can be purchased by buyers. The product offering includes all goods on the market, incl. ᴏᴛʜᴏϲᴙt goods in transit.

The volume of supply usually changes depending on the price. If the price is low, then the sellers will offer a small amount of goods, the other part of the goods will be kept in the warehouse, but if the price is high, then the manufacturer will offer the maximum number of goods to the market. When the price increases significantly and turns out to be very high, manufacturers will try to increase the supply of goods, trying to sell even defective products. The supply of goods on the market largely depends on production costs, that is, those production costs that directly form the costs associated with the production process.

The proposal is examined over three time intervals:

• Short-term - up to 1 year
• Medium term – from 1 year to 5 years
• Long-term - more than 5 years

Supply volume name the quantity of any product that an individual seller or group of sellers wants to sell on the market per unit of time under certain economic conditions

Suggestion function price characterizes the dependence of the volume of supply of a product on its monetary equivalent

Supply curve shows how many products producers are willing to sell at different prices at a given time.

As with demand, changes in quantity supplied should not be confused with changes in supply:

1. A change in the volume of supply is observed when the price of the product in question and other constant factors of market conditions change and implies movement along the supply curve (arrow No. 1)
2. A change in supply, on the contrary, means a change in the entire function of supply due to a change in any non-price factors with a constant price for the analyzed product (arrow No. 2)

• Q - number of products that the manufacturer is ready to offer
• S - sentence

Law of supply- the quantity supplied of a good increases when the price rises and decreases when it falls.

To non-price supply factors ᴏᴛʜᴏϲᴙt:

• changes in production costs as a result of technical innovations, changes in sources of resources, changes related to tax policy, as well as characteristics that influence the formation of the cost of production factors.
• Entry of new companies into the market.
• Changes in prices for other goods leading to a firm leaving the industry.
• Natural disasters
• It is worth saying - political actions and wars
• Forward economic expectations

• Firms engaged in the industry, when prices increase, use reserve or quickly commissioned new capacities, which automatically leads to an increase in supply.
• In the event of a prolonged increase in prices, other producers will flock to this industry, which will further increase production and, as a fact, an increase in supply is possible.

Technological progress has a huge impact on the supply curve. It is worth noting that it allows you to reduce production costs and vary the number of goods on the market. The analysis of the supply schedule is largely determined by the production technology used by the manufacturer, the availability and accessibility of raw materials used in the manufacture of goods. If the mobility of production and the resources used in it are high, then the supply curve will have a flatter shape, i.e. flattened down.

The impact of changes in supply and demand on the value of the equilibrium price and the equilibrium quantity of the product

Today, almost every developed country in the world is characterized by a market economy, in which government intervention is minimal or completely absent. Prices for goods, their assortment, production and sales volumes - all this develops spontaneously as a result of the work of market mechanisms, the most important of which are law of supply and demand. Therefore, let us consider at least briefly the basic concepts of economic theory in this area: supply and demand, their elasticity, the demand curve and the supply curve, as well as their determining factors, market equilibrium.

Demand: concept, function, graph

Very often one hears (sees) that such concepts as demand and quantity of demand are confused, considering them synonyms. This is wrong - demand and its magnitude (volume) are completely different concepts! Let's look at them.

Demand (English "Demand") is the solvent need of buyers for a certain product at a certain price level for it.

Quantity of demand(quantity demanded) - the quantity of goods that buyers are willing and able to purchase at a given price.

So, demand is the need of buyers for a certain product, ensured by their solvency (that is, they have money to satisfy their need). And the quantity of demand is a specific quantity of goods that buyers want and can (they have the money to do so) buy.

Example: Dasha wants apples and she has money to buy them - this is demand. Dasha goes to the store and buys 3 apples, because she wants to buy exactly 3 apples and she has enough money for this purchase - this is the value (volume) of demand.

The following types of demand are distinguished:

• individual demand– an individual specific buyer;
• total (aggregate) demand– all buyers available on the market.

Demand, the relationship between its quantity and price (as well as other factors) can be expressed mathematically, in the form of a demand function and a demand curve (graphical interpretation).

Demand function– the law of dependence of the quantity of demand on various factors influencing it.

– a graphic expression of the dependence of the quantity of demand for a certain product on its price.

In the simplest case, the demand function represents the dependence of its value on one price factor:

P – price for this product.

The graphical expression of this function (demand curve) is a straight line with a negative slope. This demand curve is described by the usual linear equation:

where: Q D - the amount of demand for this product;
P – price for this product;
a – coefficient specifying the offset of the beginning of the line along the abscissa axis (X);
b – coefficient specifying the angle of inclination of the line (negative number).

A linear demand graph expresses the inverse relationship between the price of a product (P) and the quantity of purchases of that product (Q)

But, in reality, of course, everything is much more complicated and the amount of demand is influenced not only by price, but also by many non-price factors. In this case, the demand function takes the following form:

where: Q D - the amount of demand for this product;
P X – price for this product;
P – price of other related goods (substitutes, complements);
I – income of buyers;
E – buyer expectations regarding future price increases;
N – the number of possible buyers in a given region;
T – tastes and preferences of buyers (habits, following fashion, traditions, etc.);
and other factors.

Graphically, such a demand curve can be represented as an arc, but this is again a simplification - in reality, the demand curve can have any most bizarre shape.

In reality, demand depends on many factors and the dependence of its value on price is nonlinear.

Thus, factors influencing demand:
1. Price factor of demand– the price of this product;
2. Non-price factors of demand:

• the presence of interrelated goods (substitutes, complements);
• level of income of buyers (their solvency);
• number of buyers in a given region;
• tastes and preferences of customers;
• customer expectations (regarding price increases, future needs, etc.);
• other factors.

Law of Demand

To understand market mechanisms, it is very important to know the basic laws of the market, which include the law of supply and demand.

Law of Demand– when the price of a product rises, the demand for it decreases, with other factors remaining constant, and vice versa.

Mathematically, the law of demand means that there is an inverse relationship between the quantity demanded and the price.

From a layman’s point of view, the law of demand is completely logical - the lower the price of a product, the more attractive its purchase and the greater the number of units of the product will be purchased. But, oddly enough, there are paradoxical situations in which the law of demand fails and acts in the opposite direction. This is reflected in the fact that the quantity demanded increases as the price increases! Examples are the Veblen effect or Giffen goods.

The law of demand has theoretical basis. It is based on the following mechanisms:
1. Income effect- the buyer’s desire to purchase more of a given product when its price decreases, without reducing the volume of consumption of other goods.
2. Substitution effect– the willingness of the buyer, when the price of a given product decreases, to give preference to it, refusing other more expensive goods.
3. Law of Diminishing Marginal Utility– as this product is consumed, each additional unit of it will bring less and less satisfaction (the product “gets boring”). Therefore, the consumer will be willing to continue to buy this product only if its price decreases.

Thus, a change in price (price factor) leads to change in demand. Graphically, this is expressed as movement along the demand curve.

Change in the quantity of demand on the graph: moving along the demand line from D to D1 - an increase in the volume of demand; from D to D2 - decrease in demand volume

The impact of other (non-price) factors leads to a shift in the demand curve – changes in demand. When demand increases, the graph shifts to the right and up; when demand decreases, it shifts to the left and down. Growth is called - expansion of demand, decrease – contraction of demand.

Change in demand on the graph: shift of the demand line from D to D1 - narrowing of demand; from D to D2 - expansion of demand

Elasticity of demand

When the price of a product rises, the quantity demanded for it decreases. When the price decreases, it increases. But this happens in different ways: in some cases, a slight fluctuation in the price level can cause a sharp increase (decrease) in demand, in others, a change in price within a very wide range will have virtually no effect on demand. The degree of such dependence, sensitivity of the quantity demanded to changes in price or other factors is called elasticity of demand.

Elasticity of demand- the degree to which the quantity demanded changes when price (or another factor) changes in response to a change in price or other factor.

A numerical indicator reflecting the degree of such change - demand elasticity coefficient.

Respectively, price elasticity of demand shows how much the quantity demanded will change if the price changes by 1%.

Arc price elasticity of demand– used when you need to calculate the approximate elasticity of demand between two points on an arc demand curve. The more convex the demand arc, the higher the error in determining elasticity.

where: E P D - price elasticity of demand;
P 1 – initial price for the product;
Q 1 – the initial value of demand for the product;
P 2 – new price;
Q 2 – new quantity of demand;
ΔP – price increment;
ΔQ – increment in demand;
P avg. – average prices;
Q avg. – average demand.

Point price elasticity of demand– is used when the demand function is specified and there are values ​​of the initial quantity of demand and the price level. Characterizes the relative change in the quantity demanded with an infinitesimal change in price.

where: dQ – differential of demand;
dP – price differential;
P 1, Q 1 – the value of price and quantity of demand at the analyzed point.

The elasticity of demand can be calculated not only by price, but, for example, by the income of buyers, as well as by other factors. There is also cross elasticity of demand. But we will not consider this topic so deeply here; a separate article will be devoted to it.

Depending on the absolute value of the elasticity coefficient, the following types of demand are distinguished ( types of elasticity of demand):

• Perfectly inelastic demand or absolute inelasticity (|E| = 0). When the price changes, the quantity demanded remains virtually unchanged. Close examples include essential goods (bread, salt, medicine). But in reality there are no goods with completely inelastic demand for them;
• Inelastic demand (0 < |E| < 1). Величина спроса меняется в меньшей степени, чем цена. Примеры: товары повседневного спроса; товары, не имеющие аналогов.
• Demand with unit elasticity or unit elasticity (|E| = -1). Changes in price and quantity demanded are completely proportional. The quantity demanded grows (falls) at exactly the same rate as the price.
• Elastic demand (1 < |E| < ∞). Величина спроса изменяется в большей степени, чем цена. Примеры: товары, имеющие аналоги; предметы роскоши.
• Perfectly elastic demand or absolute elasticity (|E| = ∞). A slight change in price immediately increases (decreases) the quantity demanded by an unlimited amount. In reality, there is no product with absolute elasticity. A more or less close example: liquid financial instruments traded on an exchange (for example, currency pairs on Forex), when a small price fluctuation can cause a sharp increase or decrease in demand.

Sentence: concept, function, graph

Now let's talk about another market phenomenon, without which demand is impossible, its inseparable companion and opposing force - supply. Here we should also distinguish between the offer itself and its size (volume).

Offer (English "Supply") - the ability and willingness of sellers to sell goods at a given price.

Supply quantity(volume supplied) - the quantity of goods that sellers are willing and able to sell at a given price.

The following are distinguished: types of offer:

• individual offer– a specific individual seller;
• general (aggregate) supply– all sellers present on the market.

Suggestion function– the law of dependence of the quantity of supply on various factors influencing it.

– a graphical expression of the dependence of the quantity of supply for a certain product on its price.

In simplified terms, the supply function represents the dependence of its value on price (price factor):

P – price for this product.

The supply curve in this case is a straight line with a positive slope. The following linear equation describes this supply curve:

where: Q S - the amount of supply for this product;
P – price for this product;
c – coefficient specifying the offset of the beginning of the line along the abscissa axis (X);
d – coefficient specifying the angle of inclination of the line.

A linear supply graph expresses a direct relationship between the price of a good (P) and the quantity of purchases of that good (Q)

The supply function, in its more complex form that takes into account the influence of non-price factors, is presented below:

where Q S is the quantity of supply;
P X – price of this product;
P 1 ...P n – prices of other interrelated goods (substitutes, complements);
R – availability and nature of production resources;
K – technologies used;
C – taxes and subsidies;
X – natural and climatic conditions;
and other factors.

In this case, the supply curve will have the shape of an arc (although this is again a simplification).

In real conditions, supply depends on many factors and the dependence of supply volume on price is nonlinear.

Thus, factors influencing supply:
1. Price factor– the price of this product;
2. Non-price factors:

• availability of complementary and substitute products;
• level of technology development;
• quantity and availability of necessary resources;
• natural conditions;
• expectations of sellers (manufacturers): social, political, inflation;
• taxes and subsidies;
• type of market and its capacity;
• other factors.

Law of supply

Law of supply– when the price of a product rises, the supply for it increases, with other factors remaining constant, and vice versa.

Mathematically, the law of supply means that there is a direct relationship between the quantity supplied and the price.

The law of supply, like the law of demand, is very logical. Naturally, any seller (manufacturer) strives to sell their goods at a higher price. If the price level on the market increases, it is profitable for sellers to sell more; if it decreases, it is not.

A change in the price of a product leads to change in supply. This is shown on the graph by movement along the supply curve.

Change in supply quantity on the graph: movement along the supply line from S to S1 - increase in supply volume; from S to S2 - decrease in supply volume

Changes in non-price factors lead to a shift in the supply curve ( changing the proposal itself). Expansion of offer– shift of the supply curve to the right and down. Narrowing the offer– shift left and up.

Change in supply on the graph: shift of the supply line from S to S1 - narrowing of supply; from S to S2 - sentence extension

Elasticity of supply

Supply, like demand, may vary to varying degrees depending on changes in price and other factors. In this case, we talk about the elasticity of supply.

Elasticity of supply- the degree of change in the quantity of supply (the quantity of goods offered) in response to a change in price or other factor.

A numerical indicator reflecting the degree of such change - supply elasticity coefficient.

Respectively, price elasticity of supply shows how much the quantity supplied will change if the price changes by 1%.

The formulas for calculating the arc and point price elasticity of supply (Eps) are completely similar to the formulas for demand.

Types of elasticity of supply by price:

• perfectly inelastic supply(|E|=0). A change in price does not affect the quantity supplied at all. This is possible in the short term;
• inelastic supply (0 < |E| < 1). Величина предложения изменяется в меньшей степени, чем цена. Присуще краткосрочному периоду;
• unit elastic supply(|E| = 1);
• elastic supply (1 < |E| < ∞). Величина предложения изменяется в большей степени, чем соответствующее изменение цены. Характерно для долгосрочного периода;
• absolutely elastic supply(|E| = ∞). The quantity supplied varies indefinitely with an insignificantly small change in price. Also typical for the long term.

What is noteworthy is that situations with completely elastic and completely inelastic supply are quite real (unlike similar types of elasticity of demand) and occur in practice.

Supply and demand “meeting” in the market interact with each other. With free market relations without strict government regulation, they will sooner or later balance each other (a French economist of the 18th century spoke about this). This state is called market equilibrium.

– a market situation in which demand is equal to supply.

Graphically, market equilibrium is expressed market equilibrium point– the point of intersection of the demand curve and the supply curve.

If supply and demand do not change, the market equilibrium point tends to remain unchanged.

The price corresponding to the market equilibrium point is called equilibrium price, quantity of goods - equilibrium volume.

Market equilibrium is graphically expressed by the intersection of the demand (D) and supply (S) schedules at one point. This point of market equilibrium corresponds to: P E - equilibrium price, and Q E - equilibrium volume.

There are different theories and approaches explaining exactly how market equilibrium is established. The most famous are the approach of L. Walras and A. Marshall. But this, as well as the cobweb-like model of equilibrium, a seller’s market and a buyer’s market, is a topic for a separate article.

If very short and simplified, then the market equilibrium mechanism can be explained as follows. At the equilibrium point, everyone (both buyers and sellers) is happy. If one of the parties gains an advantage (the market deviates from the equilibrium point in one direction or another), the other party will be unhappy and the first party will have to make concessions.

For example: price above equilibrium. It is profitable for sellers to sell goods at a higher price and supply increases, creating an excess of goods. And buyers will be unhappy with the increase in the price of the product. In addition, competition is high, supply is excessive and sellers, in order to sell the product, will have to reduce the price until it reaches an equilibrium value. At the same time, the volume of supply will also decrease to the equilibrium volume.

Or other example: the volume of goods offered on the market is less than the equilibrium volume. That is, there is a shortage of goods on the market. In such conditions, buyers are willing to pay a higher price for a product than the one at which it is currently being sold. This will encourage sellers to increase supply while simultaneously raising prices. As a result, the price and volume of supply/demand will reach an equilibrium value.

In essence, this was an illustration of the theories of market equilibrium of Walras and Marshall, but as already mentioned, we will consider them in more detail in another article.

Galyautdinov R.R.

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