A market is a place where buyers and sellers meet to exchange goods and services. The buyer buys at the agreed price. The buyer demands goods and services and the seller supplies at the agreed price. The agreed price where buyer and the seller are satisfied is called the equilibrium price and the amount of goods and services bought or supplied at that price are called the equilibrium quantity.
Demand is the willingness and ability of buyer to buy a good or a service at a given price in the market. Quantity demanded is the amount of a certain commodity the buyer can buy from the market at a given price for a given period of time.(Robin & Parkin,2001, p.34) Demand can be represented in a schedule showing quantities demanded at different prices for a given period of time.
Demand should be distinguished from needs, wants and desires. A need is something one cannot do without like food, water, air, clothing etc. For human beings they are called human basic needs. Wants are those human desires that one can do without like luxuries. A desire is the inner urge of an individual to have something which may or may not be met.
The law of demand states that the quantity demanded is inversely related to price. This means that more goods are demanded at low prices and less at high prices. This law of demand is represented by a curve called demand curve that explains the behavior of consumers as price of commodities changes. The price change is shown on the vertical axis and the quantity demanded at the horizontal axis as shown in fig (a) below.
The graph shows that as the price increases, the quantity demanded decreases and vice versa. The sub total of individual demands is called market demand. A downward or upward movement along the demand curve is caused by decrease or increase in price respectively. A change in other determinants of demand causes the curve to shift to the right or left depending on the direction of change.
Determinants of demand
The demand of a good or a service is determined by a number of factors the major one being price. It is also affected by the price of substitutes and compliments- substitutes are goods that serves the same purpose like tea and coffee.
If the price of coffee increases, people shift to consuming tea which serves the same purpose as coffee. This causes the demand for coffee to go down and that of tea to go up.
Compliments are goods that must be used together. For example pen and ink, nuts and bolts. If the price of ink increases, the demand for pens goes down and vice versa.
The other determinant of demand is individual income. If the income of individuals increases, their purchasing power also increases and they demand more goods than with low incomes.
The other factor is taste and preferences of individuals. If individuals have a strong taste and preference of a commodity, the demand of that commodity will go up. Lastly the individuals’ expectations about future changes in price also affect demand. If people expect the price of a certain good to go up in future, they will buy more today and less if the prices were to reduce.
This is the amount of goods and services the sellers are willing take to the market at a given price for a given period of time. The law of supply states that the quantity of goods and services supplied increases and decreases as price increase and decrease respectively. (Mankiw, 2000, p.35). That is. More will be supplied at a higher price and vice versa. This is as shown below:
Price is the major determinant of supply of goods and services. It is also affected by the number of sellers in the market. Many sellers mean higher supply. Other factors include government taxes and technology adopted which affects the cost of production. The higher the cost of production, the lower the supply in the market (Mankiw, 2000, p.37)For the market to clear there has to be an equilibrium price and quantity reached as shown in fig (c). The point of intersection of demand and supply curve shows the equilibrium point in the market where both sellers and buyers are satisfied. If the supply in the market exceeds demand, it means there is surplus in the market as shown in Fig(d) below.
The equilibrium price is at 40 where the supply is about 140 units and demand about 70 units. This means there is a surplus of 70(140-70) units. To correct the situation, the price has to be reduced in order to increase demand. When the price is reduced, the demand increases and more goods than before are bought. This ensures that the market will clear. The situation will be corrected. The price will be reduced to around 30 where 5the new equilibrium will be established.
Mankiw N. 2000. Principles of Microeconomics. London. South-Western Pub. Print.
Robin R and Parkin M. 2001. Foundations of Microeconomics. Oxford. Oxford University. Print.