A market is a place where both consumers and producers meet together to buy and sell commodities to each other in exchange for money. There are different market structures which have different characteristics of the quantity of buyers and sellers along with some other characteristics like the type of product, the price and quantity of the product, different costs of the production, entry and exit barriers etc.
We will start with the market with many buyers and sellers. Here buyers are also known as demanders, and sellers are also known as the producers or the firms; where each firm produces a good or a product or a commodity using the factors of production and then will discuss the concept of elasticity in detail.
Demand and Supply
Demand
The main motive of all individuals is to spend their income on purchasing products in order to maximize their utility or satisfaction. Though utility is hard to measure, but a person can maximize his utility given the availability of the resources.
The amount of a product that consumers wish to purchase is known as the quantity demanded. Here quantity demanded is a flow variable, and it is a desired quantity which consumers wish to purchase in a market from the sellers. There are five main factors which affect the quantity demanded of a product by each individual consumer, namely,
- Price of the product
- Prices of the other or related products
- Income and wealth of the consumers
- Taste and preferences of the consumers
- Various individual specific or environmental factors
The above factors are also known as the determinants of demand and could be written in a functional notation known as the Demand Function as follows:
D = f (Px, Pr, Y, T, S)
Here,
D stands for the demand of the good x
f represents the function
Px stands for the price of the good x
Pr is the Price of the other related good
Y stands for the income and wealth of the consumers
T represents different tastes and preferences of the consumers
S indicates all the other environmental and consumer-specific factors
The demand functions states that the quantity demanded of a product by a consumer depends on the price of the product, the price of its related product, the income of the consumers and all the other specific and environmental factors. The form of the function determines the nature of that dependence.
Supply:
The supply of goods and services is done by the firms; therefore, the firms are known as the suppliers. The main motive of the firm as a supplier is to make a profit by selling its goods and services to its ultimate consumers. For this, they hire several factors of production to which they pay their payment.
After that, the firms decide about the prices at which they will sell their product in the market, keeping in view the maximization of their profit.
The amount of a product that the firms are able to and willing to sell in the market to its consumers is known as quantity supplied. Supply is a flow variable which is affected by the following factors:
- The price of the product
- The price of the inputs or factors of production
- The state of technology
The above factors are also known as the determinants of supply, and when we express the above determinants of supply in a functional form, then it is known as supply function.
S = f (Px, F1, , Fm, T )
Where,
S = Quantity supplied
Px = Price of the good X
F1………. Fm = Prices of all inputs of production
T = Level of technology
1. Demand Elasticity: Price Elasticity, Income Elasticity & Cross Elasticity
2. Determinants of Price Elasticity of Demand
3. Measuring Price Elasticity of Demand
4. Price Elasticity of Supply and Its Determinants
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- Concept of Elasticity: Demand & Supply
- Demand Elasticity: Price Elasticity, Income Elasticity & Cross Elasticity
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- Measuring Price Elasticity of Demand
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