Understanding Market Demand

• Markets are institutional arrangements that enable buyers and sellers to exchange goods and services.
• Each market has its own special characteristics.
• All markets have demand by people for products or resources and a willingness by producers to supply those.

Demand

• Demand is the relationship between quantity and price.
• Demand is how much of a resource, good, or service consumers are willing and able to buy at a given time at various possible prices.
• Market demand is simply the sum of all individual demand.

Law of Demand

• Law of Demand describes the rationing effect of prices.
• With all other things being constant, the quantity of a product that consumers are willing and able to buy increases.
• Quantity demanded is the number of goods individuals are willing and able to buy at a particular price during a particular period of time.
• A demand schedule is a table showing the quantities of a product that would be purchased at various prices at a given time and place.
• A demand curve is a graph of the demand schedule to show the relationship between price and quantity demanded.
• Change in quantity demanded is movement from one point to another on the same demand curve when the price of a product changes.

Determinants of Demand

• Consumer taste and preferences
• Consumer income
• Population
• Prices of related goods
• Expectations of future prices

Elasticity of Demand

• Elasticity of demand describes how much a change in price affects the quantity demanded.
• Elasticity of demand is calculated using the ratio of the percentage change in quantity demanded to the percentage change in price that brings about the change in quantity demanded.
• Determinants of the Elasticity of Demand:
  • Luxuries vs. necessities
  • Proportion of income
  • Sustainability
  • Time
• Elasticity of Demand = (Percentage change in Quantity demanded) / (Percentage change in Price)

Supply

• Supply is the number of items that sellers are willing and able to sell at different prices during a specific period.
• Market supply is simply the sum of all individual supply.
• A supply schedule shows the quantity of items sellers would offer for sale at different prices.

Supply Curve

• A supply curve is a graph of the demand schedule.
• It shows the relationship between price and quantity demanded.

Law of Supply

• It restates that sellers will offer more of an item at a high price and less at a low price.
• The equation shows the direct relationship between price and quantity supplied.
• Quantity supplied pertains to the number of goods that individuals can sell at a particular time.
• Change in quantity supplied refers to a movement along a supply curve.
• The factor that can directly cause a change in the quantity supplied of a good is a change in the price.

Elasticity of Supply

• It is measured as the ratio of proportionate change in the quantity supplied to the proportionate change in price.
• High elasticity indicates the supply is sensitive to changes in prices.
• Low elasticity indicates little sensitivity to price changes.
• Unitary elasticity means no relationship with price.
• Elasticity of Supply = (Percentage change in Quantity Supplied) / (Percentage change in Price).

Change in Supply

• Technological progress
• Number of sellers
• Cost of production
• Expectations of future price

Determinants of the Elasticity of Supply

• Limited amount of raw materials
• Difficulty of producing goods
• Time period
• Production surplus
• Inventories

Market Equilibrium

• Refers to a condition where a market price is established through competition.
• The amount of goods or services purchased by buyers is equal to the amount of goods or services produced by sellers.
• An excess in quantity demanded will lead to the price increase, which will continue until demand and supply are equal.