INTRODUCTION OF DEMAND And SUPPLY
ECONOMIC & BUSINESS ENVIRONMENT – CSEET (Paper-3)
This topic Supply and Demand of Economics and Business Environment of Paper -3 of CS Executive Entrance Test is just going to a refresher of the Economics that most of the students might have gone through in their higher secondary education. Even if not, be sure that at the end of this article you would have a pragmatic understanding to the demand, supply and the markets that they play on.
Since, it is going to be an objective paper let you learn the subject in a similar way so that basic concepts gets registered into bulletins and illustrations helps to have a better understanding.
Here is the table of contents:
– Supply and Demand Meaning
– Law of Demand
– Exceptions to law of demand
– Law of Supply
– Elasticity of Demand
– Increase and decrease in demand
– ELASTICITY OF SUPPLY
– Forms of Market Competition
Now let’s dive in the topic:
SUPPLY AND DEMAND MEANING
Demand Meaning – Desire backed up by the purchasing power of the consumer. It has two elements i.e. consumers desire to purchase goods or services and willingness to pay for it. A mere desire without purchasing power or ability to pay without desire to purchase cannot be termed as purchase.
Supply – Meaning of supply is relatively simple, it refers to the total amount of a specific goods or services that is available to consumers at a specific price or range of prices..
LAW OF DEMAND
The law of demand basically deals with the inverse relationship between price and quantity of particular goods or services. But it is under the assumption, other factors like consumer preferences, price of competitive goods, purchasing power of the consumer are being equal and does not play any role in law of demand.
It is just the relationship between price and quantity. For instance, let Mangoes be the goods that we test our law of demand-
To look at the assumptions in detail, “the other things” being equal or those remain statics are the condition to establish law of demand considering price as the only variable factor.
Dx = f(Px)
The condition assumes that there is NO CHANGE in-
- Consumer’s income
- Consumer’s preferences
- Fashion/ trend
- Price of related goods
- Size, age composition and sex ration of the population
- Range of goods available to the consumers
- Distribution of income and wealth of the community
- Government policy
- Weather conditions
- Future expected future price changes or shortages
Demand Curve – In normal case, Demand curve is a downward sloping curve that show the inverse relationship between the price and quantity demanded. However there is a possibility of an upward sloping curve that falls as an exception, where in the will be direct relationship between the price and the quantity. Those exceptions are given below-
Exceptions to Law of Demand
– Giffen Goods – Referred to as Inferior Goods. When the prices falls, quantity purchase will also be less thus establishing a direct relationship. This is due to the negative income effect and consumers increasing preference for a superior commodity. Essential goods like rice, wheat, bread are examples of giffen goods.
– Articles of Snob Appeal – Snob Appeal means the desire to own a prestigious good. These commodities are demanded just because they are expensive or prestige goods. Example: luxury goods, gold, diamond etc.
– Speculation – At times of speculation the conscience of the consumer is convinced that the price of a commodity in future will rise further. Thus in those cases even if the price rises the consumer desire to buy the goods.
– Consumer’s Psychological Bias or Illusion: When the consumer is wrongly biased against the quality of the commodity with the price change, he may contract this demand with a fall in price.
LAW OF SUPPLY
Supply represents how much the market can offer. The quantity refers to the amount of a good produces are willing to supply for a certain price or set of prices over a period of time. The law of supply states that a firm will produce and offer to sell higher quantities of a good or service if the price of the good or service rises, provided “other things being equal”. Thus in law of supply, there exists a direct relationship between price and quantity supplied.
Similarly, other things being equal in law of supply assumer’s that there is NO CHANGE in –
- State of technology
- Price of factors of production
- Numbers of firms in the market
- Goals of the firm
- Seller’s expectations regarding future prices
- Tax and subsidy of the products
- Price of other goods
The equilibrium price is the market price where the quantity of goods supplied is equal to the quantity of goods demanded. This is the point at which the demand and supply curves in the market intersect. At equilibrium, there is no shortage or surplus unless a determinant of demand or supply changes.
ELASTICITY OF DEMAND
The Elasticity of Demand refers to how sensitive the demand for a good is to change in other variables such as prices and consumer’s income etc. In other words, it is the responsiveness of the quantity demanded of a commodity to changes in one f the variables on which demand depends.
The variables on which demand can depend on are:
- Price of the commodity
- Price of related commodities
- Consumer’s income etc.,
INCREASE AND DECREASE IN DEMAND
– Changes in demand include an increase or decrease in demand. Due to the change in the price of related goods, the income of consumers, and the preferences of consumers, etc. the demand for a product or service changes.
– Increase in Demand: When demand changes not because of price but because of changes in other determinants of demand, it is a case of either increase or decrease in demand. “Increasein demand means more demand at the same price”.
– Increases in demand are shown by a shift to the right in the demand curve. This could be caused by a number of factors, including a rise in income, a rise in the price of a substitute ora fall in the price of a complement.
– Decrease in Demand: Decrease in demand means, “Less demand at same price”. Demand can decrease and cause a shift to the left of the demand curve for a number of reasons, including a fall in income, assuming a good is a normal good, a fall in the price of a substitute, and a rise in the price of a complement.
ELASTICITY OF SUPPLY
The elasticity of supply establishes a quantitative relationship between the supply of a commodity and its price. The major factor that influences the supply of a commodity is its price. Thus, the elasticity of supply establishes the change in supply of a commodity as to a change in price.
FORMS OF MARKET COMPETITION
A variety of market structures will characterise an economy. Such market structures essentially refer to the degree of competition in a market. There are other determinants of market structures such as the nature of the goods and products, the number of sellers, number of consumers, the nature of the product or service, economies of scale etc.,
The five basic types of market structures in any economy are–
Perfect Competition – In a perfect competition market structure, there are a large number of buyers and sellers. All the sellers of the market are small sellers in competition with each other. There is no one big seller with any significant influence on the market. So, all the firms in such a market are price takers.
It is pretty much a theoretical concept. There are certain assumptions when discussing the perfect competition as follows:
• The products on the market are homogeneous, i.e. completely identical
• All firms only have the motive of profit maximization
• There is free entry and exit from the market, i.e. there are no barriers
• And there is no concept of consumer preference
Monopolistic Competition – This is a more realistic scenario that actually occurs in the real world. In monopolistic competition, there are still a large number of buyers as well as sellers. But they all do not sell homogeneous products. The products are similar but all sellers sell slightly differentiated products.
Now the consumers have the preference of choosing one product over another. The sellers can also charge a marginally higher price since they may enjoy some market power. So, the sellers become the price setters to a certain extent.For example, the market for a cereal is a monopolistic competition.
Oligopoly – In an oligopoly, there are only a few firms in the market. While there is no clarity about the number of firms, 3-5 dominant firms are considered the norm. So, in the case of an oligopoly, the buyers are far greater than the sellers.
The firms in this case either compete with another to collaborate together, they use their market influence to set the prices and in turn maximise their profits. So, the consumers become the price takers. In an oligopoly, there are various barriers to entry in the market; and new firms find it difficult to establish themselves.
Monopoly – In a monopoly type of market structure, there is only one seller, so a single firm will control the entire market. It can set any price it wishes since it has all the market power. Consumers’ do not have any alternative and must pay the price set by the seller. Monopolies are extremely undesirable. Here the consumers lose all their power and market forces become irrelevant.However, a pure monopoly is very rare in reality.
Duopoly – A duopoly is a kind of oligopoly: a market dominated by a small number of firms. In the case of a duopoly, a particular market or industry is dominated by just two firms.
It usually means the two duopolistic firms have a great deal of influence, and their actions, as well as their relationship to each other, powerfully shape their industry. Duopolistic markets are imperfectly competitive, so entry barriers are typically significant for those attempting to enter the market, but there are usually still other, smaller businesses persisting alongside the two dominant firms.
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