Demand, Supply and Market Equilibrium
Demand, Supply and Market Equilibrium Every market has a demand side and a supply side and where these two forces are in balance it is said that the markets are at equilibrium. The Demand Schedule: The Demand side can be represented by law of downward sloping demand curve. When the price of commodity is raised (ad other things held constant), buyers tend to buy less of the commodity.
Similarly when the price is lowered, other things being constant, quantity demanded increases. The above figure shows quantity demanded at different prices.
Here we can observe that the quantity demanded increases as the price decreases and vice versa keeping other things constant. This happens basically due to factors namely Income effect and substitution effect. Demands for any quantity is determined by three factors namely want for the commodity, will to buy the same and ability to buy the same. A whole array of factors determines how much would be the quantity would be demanded at a given price i. e. the other factors that are mentioned above: 1. Average income of the consumer 2. Size of the market . Prices and availability of related goods 4. Tastes and preferences of the consumer 5. Special influences Shift in demand curve Vs Movement along Demand Curve or Change in Demand Vs Change in Quantity Demanded A change in demand occurs when one of the elements underlying the demand curve shifts. For example if a person likes Pizzas and his income increases. So as his income increases he will demand more of pizzas even if the prices of pizzas do not change. In other words, higher income level has resulted in higher demand for pizzas i. e. here are a shift n the demand curve or change in demand. Again if the price of pizzas fall and other things viz. income of the consumer remains same. Again there would rise in quantity demanded. This increase in quantity demanded is due to decrease in price. This change represents movement along demand curve or change in quantity demanded. Further this can be explained by the following graph. Here we can observe that with increase in income level the consumer shifted to series 2 and with decrease in price of the commodity he would move along the same demand curve in series one.
The Supply Schedule: Supply schedule shows the amount of a commodity that the seller would like to offer for sell at various prices. Supply curves are drawn on assumption of constant technology, and input or resources (labour, land and capital) prices. The above curves shows amount of commodity that a supplier would like to sell at various prices. For example at a price of Re. 1 he does not wish to sell any quantity and at a price of Rs. 5 he would like to sell 18 units of the commodity. There are various factors effecting supply curve they are stated as follows: 1. Technology . Input Prices 3. Prices of related goods 4. Government Policy 5. Special influences Shifts of Curves Vs Movement along the curves As is the case with the demand curve, supply curves also follow the same principal. Change in any of the above mentioned factors would cause a shift in curves and any change occurs due to change in price it is called movement along the curve. The same is shown below: Equilibrium of Supply and Demand The market equilibrium comes at that price and quantity where the forces of supply and demand are in balance. At the equilibrium price amount that the uyer wants to buy is just equal to the amount that seller wants to sell. The reason we call this equilibrium is that when the forces of supply and demand are in balance, there is no reason for price to rise or fall, as long as other things remain unchanged. In economics equilibrium means that the different forces operating on a market are in balance, so the resulting price and quantity reconcile the desires of purchases and suppliers. Equilibrium can be shown and explained by the below mentioned graphical representation. The above graph shows at a price of Rs. 0, quantity demanded and supplied is 19 units. Any increase (or decrease) in price would result in fall (or rise) in demand, keeping the other things constant. Further the relationship between demand curve and supply curve are discussed as below: | Demand and Supply Shifts| Effect on Price & Quantity| If Demand rises| Demand curve shifts to the right| Price , Quantity | If Demand falls| Demand curve shifts to the left| Price , Quantity| If Supply rises| Supply curve shifts to the right| Price , Quantity| If Supply falls| Supply curve shifts to the left| Price , Quantity |
When there is excess demand or excess supply, the market by determining the equilibrium price and quantities, allocates or rations out the scares goods among the possible uses. The market place through its interaction of supply and demand does the rationing. This is rationing by the purse. When cell phones was launched in India cost of both handsets and call rates were high, infact even incoming calls were charged exuberantly. Then came Reliance with its dream of handing cell phones to each Indians.
They came out with the concept of no charges for incoming calls and also came out with lower call rates as compared to the existing players it created an instant demand for its connections and hence captured major products and as a result all the existing players had to lower their tariffs matching to that of Reliance. Again the handsets were costly but Nokia came into the market with wide range of handsets and was instant hit. It captured the market initially. Recently we see Samsung coming out with lower ranged handsets with all the applications and features combined in its handsets at a lower price and creating a demand for its products.
There are some exception to the theory of price and demand. There are few players in this industry which are exceptions viz. Blackberry and Apple’s i-phones. I-phones acts as an exception because of its features and the status and brand value it commands in the market. While Blackberry has a feature called BBM and its image as business phones due to which it acts an exception to the law of demand as irrespective of its price business class still demands it. We can say that the market works on the demand and supply structure but still there are some exceptions to these rules also as discussed above.