market mechanism
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Market MechanismMarket Mechanism
What is What is market?market?
Literal meaning-Literal meaning-Place where goods and services arePlace where goods and services are brought and soldbrought and sold
In economics-In economics- It is used in abstract sense.It is used in abstract sense. According to SAMUELSON & NORDHAUS According to SAMUELSON & NORDHAUS A market is a mechanism by which buyers & sellersA market is a mechanism by which buyers & sellers interact to determine the price & quantity of a good or interact to determine the price & quantity of a good or
service.service. Sellers & buyers- individuals, firms, factories, dealers & Sellers & buyers- individuals, firms, factories, dealers &
agentsagents
Features of market Features of market conceptconcept• A market need not be situated in a particular locality or A market need not be situated in a particular locality or
areaarea• Buyers & sellers need not come into personal contact Buyers & sellers need not come into personal contact
with each otherwith each other• Word market may refer to a commodity / service or to a Word market may refer to a commodity / service or to a
geographical areageographical area• Economists distinguish market on the basis ofEconomists distinguish market on the basis ofNature of goods & services (input market, output market)Nature of goods & services (input market, output market)No. of firms & degree of competition. (competitive mkt., No. of firms & degree of competition. (competitive mkt.,
monopolistic market)monopolistic market)
What is market What is market mechanism?mechanism?
The market for a product works on certain The market for a product works on certain market principles i.e. the laws that govern the market principles i.e. the laws that govern the working of the market system, also called working of the market system, also called market mechanismmarket mechanism
Working of the market system is governed by Working of the market system is governed by certain fundamental laws of market called certain fundamental laws of market called Law of Demand and Supply.Law of Demand and Supply.
Clear understanding of this is required for Clear understanding of this is required for chalking out an appropriate market strategy.chalking out an appropriate market strategy.
Supply side of the Supply side of the marketmarketSome important terms in this:-Some important terms in this:-
Supply-Supply- It is the quantity of a commodity that its It is the quantity of a commodity that its producers/ sellers offer for sale at a given price, per unit producers/ sellers offer for sale at a given price, per unit of time.of time.
Market supply-Market supply- Sum of suppliers of a commodity made by Sum of suppliers of a commodity made by all the individual firms or their supply agencies. Market all the individual firms or their supply agencies. Market supply of product is governed by the law of supply.supply of product is governed by the law of supply.
Supply of a commodity depends on:-Supply of a commodity depends on:-
1.Its price1.Its price
2.Cost of production.2.Cost of production.
Law of supply-
Supply of a product – Increase in price
And vice versa all the other factors remaining constant.
Other things – technology, price of related goods, weather & climatic conditions in case of agricultural goods.
Supply schedule- A supply schedule is a tabular presentation of the law of supply.
Supply curve- Graphical representation of supply schedule.
Pric
e
Quantity supplied per unit of time
Supply function- It is a mathematical statement which states the relationship between the quantity supplied of a commodity and its price.
Qx = 10Px
Qx = quantity supplied of commodity X
per unit of time
Px = Its Price
How determinants of How determinants of supply causes shift in supply causes shift in supply curve?supply curve?1. Change in Input prices-
Input prices – Use of inputs
As a result, Product Supply
Supply curve SS shifts to the right to SS’ Supply curve SS shifts to the right to SS’
When input Price increases, product supply curve When input Price increases, product supply curve shifts toshifts to
SS’’SS’’
Quantity
Supply CurveSupply Curve
Pri
ce
SS’S’’
2. Technological Progress-
Technological changes that ------ Product Supply reduce cost of production or increase efficiency in production
3.Price of product substitutes-
Fall in the price of --------- Supply of other one of the product ’s substitutes
4.Nature & Size of the industry-
Depend on whether an industry is monopolized or competitive.
Under monopoly -------- Supply is fixed
If monopolized industry ------- Total supply is made competitive
If size of an industry ------- Total supply due to new firms joining the industry
5. Government policy-
When govt. imposes --------- Production tends to fall restrictions on production Supply
6.Non economic factors –
Labor, strikes, lockouts, communal riots, epidemics, affect supply
Market equilibrium- Market equilibrium- equilibrium of demand & equilibrium of demand & supplysupply
Determination of price in a Free marketDetermination of price in a Free marketFree market – Free market – is one in which the market forces of is one in which the market forces of
demand & supply are free to take their own course & no demand & supply are free to take their own course & no outside control on price, demand & supplyoutside control on price, demand & supply
Market equilibriumMarket equilibrium – – Refers to a state of market in whichRefers to a state of market in which Quantity demanded = Quantity supplied Quantity demanded = Quantity supplied
of a commodity of a commodity of the commodityof the commodity
Equality of demand and supply produces equilibrium Price Equality of demand and supply produces equilibrium Price It is also called It is also called Market Clearing PriceMarket Clearing Price because market is because market is cleared in the sense that there is no unsold stock and no cleared in the sense that there is no unsold stock and no
unsupplied demandunsupplied demand..
Determination of market priceDetermination of market priceIn a free market, disequilibrium itself creates the In a free market, disequilibrium itself creates the condition for equilibrium.condition for equilibrium.
When there is excess supply, it forces downwardWhen there is excess supply, it forces downward adjustment in the price & quantity supplied.adjustment in the price & quantity supplied.
When there is excess of demand it forces upward When there is excess of demand it forces upward adjustment in the price & quantity demanded.adjustment in the price & quantity demanded.
Process of downward & upward adjustment in price Process of downward & upward adjustment in price determines till price reaches equilibrium and the determines till price reaches equilibrium and the quantities supplied and demanded are in balancequantities supplied and demanded are in balance
This process is automatic.This process is automatic.
Market mechanism: How market brings balance?
Market mechanism: Process of interaction between the market forces of demand & supply to determine equilibrium price.
1) If
Supply with demand
Then it gives sellers an opportunity to raise its price & it prepares buyers to accept & pay higher price. As result price goes up.
So we conclude that :-
If Supply with demand ------Prices
2) If
Supply with demand
Excess supply forces the competing sellers to cut down the price in order to clear their unsold stock.
Some firms find low price unprofitable & go out of the market.
Some cut down their productivity, supply goes down
Thus we conclude that :-
If Supply with demand ------- Prices
Quantity
Demand, Supply, and Demand, Supply, and Market Price Market Price
Pri
ce
SupplyDemand
EE
Quantity
SurplusSurplus
Pri
ce
SupplyDemand
E
Surplus
The equilibrium condition is not fulfilled at any other point on the demand and supply curves. Therefore, there would be either excess supply or shortage.
Quantity
ShortageShortage
Pri
ce Supply
Demand
E
Shortage
The equilibrium condition is not fulfilled at any other point on the demand and supply curves. Therefore, there would be either excess supply or shortage.
Shift in Demand and Supply Shift in Demand and Supply curves and equilibriumcurves and equilibrium
O
Quantity
D
D’’
D’
D
P
M
Q N
S
S Shift in demand curve and equilibrium
Price
Quantity
S
S’’
D
D
P
M
Q N
S
S’
Price
Shift in Supply curve and equilibrium
Quantity
Price
S
S3
D1
D
E1
Q1
S
S1
P1
D2
P0
Q3
E3E2
Q2
D
S
S3
Parallel shift in Demand Supply curve and its effect on equilibrium price and output
Simultaneous Shift in Simultaneous Shift in Demand and Supply curvesDemand and Supply curves
Parallel shift in Demand Supply curve and its effect on equilibrium price and output
Quantity
S
S2
D1
D
E1
Q1
S
S1
Price
P1
D2
P2
Q2
E2
D