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Market Mechanism
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What is market?
In simple words, it is a Place where goods and services arebrought and sold. For example chandani chowk,connaught palace etc.
In economics-A market need not be situated in a particular place or
service.
According to SAMUELSON & NORDHAUSA market is a mechanism by which buyers & sellersinteract to determine the price & quantity of a good orservice.
Sellers & buyers- individuals, firms, factories, dealers &
agents
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Features of market concept
A market need not be situated in a particular locality orarea
Buyers & sellers need not come into personal contact
with each other Word market may refer to a commodity / service or to a
geographical area
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What is market mechanism?
The market for a product works on certain marketprinciples i.e. the laws that govern the working ofthe market system, also called market mechanism
Working of the market system is governed by certainfundamental laws of market called Law of Demandand Supply.
Clear understanding of this is required for chalkingout an appropriate market strategy.
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Supply side of the market
Some important terms in this:-
Supply- It is the quantity of a commodity that itsproducers/ sellers offer for sale at a given price, per unit
of time.
Market supply- Sum of suppliers of a commodity madeby all the individual firms or their supply agencies.
Market supply of product is governed by the law ofsupply.
Supply of a commodity depends on:-
1.Its price
2.Cost of production.
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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 tabularpresentation of the law of supply.
Supply curve- Graphical representation of supply
schedule.
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Price
Quantity supplied per unit of time
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Market equilibrium-equilibrium of demand & supply
Determination of price in a Free marketFree market is one in which the market forces of
demand & supply are free to take their own course & nooutside control on price, demand & supply
Market equilibriumRefers to a state of market inwhich
Quantity demanded = Quantity suppliedof a commodity of the commodity
Equality of demand and supply produces equilibrium PriceIt is also called Market Clearing Price because marketiscleared in the sense that there is no unsold stock and no
unsupplied demand.
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Determination of market priceIn a free market, disequilibrium itself creates thecondition for equilibrium.
When there is excess supply, it forces downward
adjustment in the price & quantity supplied.
When there is excess of demand it forces upwardadjustment in the price & quantity demanded.
Process of downward & upward adjustment in price
determines till price reaches equilibrium and thequantities supplied and demanded are in balance
This process is automatic.
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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 & itprepares buyers to accept & pay higher price. As resultprice goes up.
So we conclude that :-
If Supply with demand ------Prices
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2) If
Supply with demand
Excess supply forces the competing sellers to cut downthe 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
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Quantity
Demand, Supply, andMarket Price
Price
SupplyDemand
E
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Quantity
Surplus
Price
SupplyDemand
E
Surplus
The equilibrium condition is not fulfilled at any other point on thedemand and supply curves. Therefore, there would be eitherexcess supply or shortage.
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Quantity
Shortage
Price
E
Shortage
The equilibrium condition is not fulfilled at any other point on the demandand supply curves. Therefore, there would be either excess supply or
shortage.
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Shift in Demand and Supplycurves and equilibrium
O
Quantity
D
D
D
D
P
M
Q N
S
S Shift in demandcurve andequilibrium
Price
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Quantity
S
S
D
D
P
M
Q N
S
S
Price
Shift in Supplycurve andequilibrium
P ll l hif i D d S l
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Parallel shift in Demand Supplycurve and its effect on equilibriumprice and output
Quantity
S
S2
D1
D
E1
Q1
S
S1
Price
P1
D2
P2
Q2
E2
D