SUPPLY AND DEMAND IN ECONOMY

In this article, we will talk about supply , demand and market . We will convey these concepts to you in detail, without causing any confusion, but with accurate and sufficient information. Before this article, we recommend you to read our Money and Interest , which is prepared for you by our Economics Guide .  

WHAT IS THE MARKET?

The market is an environment where buyers and sellers come together. The market does not only cover the physical environment. The buyer and the seller can also reach each other via the Internet or e-mail, thus creating the market. There are certain conditions for an effective market. 

  • Having a large number of buyers and sellers acting independently for their own interests
  • Having information about the goods traded
  • Free entry and exit of the market

The fact that the market has a large number of sellers and buyers ensures that the price of a product does not depend on a single buyer or seller. If there is a single buyer who buys a product, it is called monopson, and if there is only one seller for a product, it is called monopoly.Having information about the goods is to know the cost of production of the goods, easy access to the features of the product and the status of the sale of expensive means that there is no intermediate gain opportunity.Increases the effectiveness of the market while entering the market easily and freely.

COMPETITIVE MARKET

Supply and demand are affected by many factors. As a result, the price and quantity of the goods change. The occurrence of such changes in the market of one good creates changes in the market of other goods. Interaction between markets is an important event and in some cases can lead to very negative consequences.In order to create a competitive market, it is necessary to add another condition to the market conditions mentioned above. If there are different sellers that sell the same products in a market, ie price acceptors , this market is a competitive market. Price acceptors sell the same products and sell at the market price without affecting prices.In the competitive market, the consumer receives the maximum benefit at the lowest cost that does not harm the producers. Producers are also advantageous in the long run and production costs are reduced.

CONSUMER BEHAVIOR

When people buy a product, they almost always try to increase their own benefits. Nobody wants to buy a product that they don’t want or that doesn’t work, which is a very natural behavior. In economy, this behavior is called benefit maximization . However, the benefit consumers can have is limited to their budget or the money they can spend on this expenditure. This constraint is also called budget constraint . Benefit maximization is also subject to this budget constraint.Another concept of consumer behavior is the diminishing marginal benefit . Let us simply explain this concept with an example. You read a favorite book for two hours a day and we all know that reading is a very useful activity. So why don’t you read that book 24 hours a day, even though you love it and you know it’s good to read it? The answer is a diminishing marginal benefit. As time goes by, your marginal cost approaches your marginal benefit and equals after a certain point. From this point on, you will also read books daily.

REQUEST

People’s desire to buy a product is called demand. These people want to get the goods they want to buy at a lower price. Many people want to buy a product at a lower price is called the law of demand in the economy. There are several reasons for the demand law.

DECREASING MARGINAL BENEFIT

We have briefly described the diminishing marginal utility above. As a consumer buys a product, its marginal utility decreases and equals its marginal cost. After this point, the reception stops. If the seller reduces the marginal cost of the consumer through activities such as discounts, campaigns, the marginal benefit of the consumer remains above the marginal cost and increases consumer shopping. This increases demand.

INCOME EFFECT

The revenue impact is related to your budget constraint. If the price of the product you want to buy decreases, your purchasing power increases so that you can buy the product you will not buy or you can buy more of the product. If the price of the product increases, your purchasing power decreases and vice versa.

SUBSTITUTE EFFECT

Suppose you go around the market to buy a product. When searching for the product you want, you will find a very similar and more affordable product and you have bought this product. This indicates that the substitution effect has taken place.

WHAT IS DEMAND FLEXIBILITY?

People buy a lot of products. Some products do not attach to the price at all, but in some products they do a price search and try to reach this product at least marginal cost. 

  • For example, people who are met in an emergency and who are absolutely required to take a taxi do not care about distance and cost. In other words, if the purchase of a good is essential or if there is no substitution, then there is no elasticity of demand.
  • For example, a person who wants to buy a car can postpone this purchase, make a price survey and turn to substitute products. There is flexibility in demand in this case .

SUPPLY

Supply represents the desire and ability of producers to produce at different prices in the market. The law of supply states that as producers increase prices, they will have the desire and ability to produce and sell more.

WHAT IS SUPPLY FLEXIBILITY?

Elasticity of supply is the sensitivity of a manufacturer to a price change in a certain quantity of product that it wants to produce. The important point in this concept is time. If the producer can respond quickly to this price change, there is supply flexibility, if the producer is not able to respond quickly to this price change, there is no supply flexibility. For example, while a juice producer can easily respond to changes in costs, a wine producer cannot respond to these changes in a short time.

PRICE FORMATION AND BALANCE

If supply meets demand in the market, price is formed. It is formed and balanced as a result of the struggle of the buyers who want to maximize the price benefit and the sellers who want to increase the profit. The market is stable unless there is a surplus or shortage of goods and services. Market balance is the most advantageous situation for producers and consumers.If the market price is higher than the equilibrium price, the production surplus occurs for that good. Otherwise, if the market price is lower than the equilibrium price, there will be a shortage in the market for that good.