market mechanism

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Market Mechanism Market Mechanism

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Page 1: Market mechanism

Market MechanismMarket Mechanism

Page 2: Market 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

Page 3: Market mechanism

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)

Page 4: Market mechanism

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.

Page 5: Market mechanism

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.

Page 6: Market mechanism

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.

Page 7: Market mechanism

Pric

e

Quantity supplied per unit of time

Page 8: Market mechanism

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

Page 9: Market mechanism

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’’

Page 10: Market mechanism

Quantity

Supply CurveSupply Curve

Pri

ce

SS’S’’

Page 11: Market mechanism

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

Page 12: Market mechanism

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

Page 13: Market mechanism

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..

Page 14: Market mechanism

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.

Page 15: Market mechanism

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

Page 16: Market mechanism

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

Page 17: Market mechanism

Quantity

Demand, Supply, and Demand, Supply, and Market Price Market Price

Pri

ce

SupplyDemand

EE

Page 18: Market mechanism

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.

Page 19: Market mechanism

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.

Page 20: Market mechanism

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

Page 21: Market mechanism

Quantity

S

S’’

D

D

P

M

Q N

S

S’

Price

Shift in Supply curve and equilibrium

Page 22: Market mechanism

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

Page 23: Market mechanism

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