The mechanism of market functioning. Supply and Demand Market Demand and Supply
Demand from an individual consumer is called individual demand, and the demand from all consumers in the market for a given product is called market demand . The magnitude of market demand, among other things, depends on the number of consumers in the market. Obviously, individual demand curves look different for different consumers in the market. The market demand curve is the sum of the individual demand curves of all buyers in the market.
Let's imagine that there are two buyers in the market. In Fig. Figure 4.27 shows the individual demand curves of these people (D i 1, D i 2) and the market demand curve D m. Let’s say that at a price of 20 rubles per unit of goods, the quantity of demand of both consumers will be equal to zero. At a price of 10 rubles/unit. The first consumer will still not buy anything, and the second will buy 4 units of the product. If the price of a product drops to 1 ruble/unit, the first consumer will buy 10 units, and the second 8 units. goods. Together consumers will buy 4 units. goods for 10 rubles, 18 units. at a price of 1 rub.
If there are several consumers on the market for a product, each of them values the product differently and receives unequal utility from it. There are people who are willing to pay a large amount for a unit of good, and people who do not really value this good. Then the market demand schedule can be represented as a set of prices that consumers are willing to pay for a particular quantity of goods (Fig. 4.28).
Rice. 4.27. Individual and market demand curves.
Rice. 4.28. Market demand curve.
For the first unit of product Q 1, the consumer who values this product the most is willing to pay price P 1. Another consumer is willing to pay the price P 2 , a third consumer – the price P 3 , etc. If the product is discrete (i.e. indivisible, consisting of individual units that cannot be divided into smaller parts), then the market demand curve will consist of individual points 1,2,3, and it can be conventionally represented as a broken line ( dotted line 1-A-2-B-3 in the figure). If we imagine that a product can be divided into smaller units, or if we consider a large market in which sales volumes amount to thousands, etc. units, then the demand curve can be represented as a continuous curve 1-2-3. In fact, it will also consist of many points, but due to their large number, they will merge into a continuous curve.
The maximum prices that consumers are willing to pay for a particular quantity of a good are also called reserve prices . The market demand curve thus consists of the reserve prices for all consumers. From the difference between reserve prices and the actual market price, the concept consumer surplus .
Market demand depends on all those factors that determine individual demand, including the price of the product, the income and tastes of consumers, and the prices of other goods. In addition, its value is influenced by the number of consumers who wish to purchase the product at each given price. As a result of a change in the number of consumers, the market demand curve shifts to the right or left. Market demand to a certain extent depends on the differentiation of individual incomes in society. As a result of its strengthening, the market demand curve becomes convex towards the origin. This is explained by the fact that when the price decreases, demand increases both from traditional buyers and due to the emergence of new consumers of cheaper goods.
In the absence of differentiation of consumer incomes, the market demand curve does not differ in shape from individual demand curves, which are concave from the origin. This shape of the curves is explained by the saturation of demand as purchases of goods by an individual consumer increase and its price elasticity decreases. We have already said that the market demand curve is formed by adding the individual demand curves of all buyers. However, the process of interaction between individual and market demand is not limited to this. The opposite effect is possible - from market demand on the demand of individual buyers, which is reflected in the so-called imitation (fashion) effect and the “snob” effect.
The imitation effect (fashion) is that individual consumers increase their purchases of a product if its overall sales volume increases. If the price of a product decreases from P 1 to P 2, then the consumer, taking into account his preferences, increases the quantity of the product purchased from Q 1 to Q 2. If other buyers also increase the demand for this product and a fashion effect occurs, then our consumer will decide to buy even more of the product, i.e. Q 3. An increase in the volume of purchases from Q 1 to Q 2 will be the result of the price change effect, and an increase in the volume of purchases from Q 2 to Q 3 will be the result of the imitation effect (Fig. 4.29).
The snob effect works in the opposite direction to the imitation effect. Its essence lies in the fact that the demand of individual consumers decreases as the volume of purchases of a given product from other consumers increases (Fig. 4.30). When the price of a product decreases from P 1 to P 2, the “snob” will first increase the volume of purchases from Q 1 to Q 2. But if, when the price of a given product decreases, other consumers begin to buy it in larger quantities, then the demand for the product on the part of the “snob” in question will decrease, perhaps even the magnitude of demand at a higher price will become less (Q 3).
Rice. 4.29. The individual demand curve and the imitation effect.
Rice. 4.30. The individual demand curve and the snob effect.
A variation of the “snob” effect is the prestige effect. It occurs when purchasing goods that, according to buyers, emphasize their social status.
The effects discussed above act in the opposite direction, and therefore can often be neglected when analyzing market pricing.
CONCLUSIONS
1. A rational consumer chooses a set of goods that provides him with the greatest utility. Utility refers to the satisfaction that customers receive from consuming goods and services.
2. The more goods a person possesses, the less utility each additional unit of this good brings to him. The decrease in additional satisfaction from consuming another unit of goods is called the law of diminishing marginal utility.
3. According to the cardinalist approach, it is possible to determine by how many units the utility of one set of goods is higher than the utility of another set. According to the ordinal approach, the consumer cannot measure utility quantitatively, but he can always compare the utility of, for example, two sets of goods, and say that one of them is more preferable than the other.
4. Rule for maximizing total utility: the consumer distributes his income in such a way that the last monetary unit spent on the acquisition of any good would bring the same marginal utility. To maximize utility, it is necessary that the weighted marginal utilities of goods be equal.
5. The analysis of consumer behavior in the ordinalist concept is considered using indifference curves and budget constraints. An indifference curve is a set of consumption bundles that provide the consumer with the same utility, i.e. neither is preferable to the other. The budget constraint shows all the sets of goods that a buyer can purchase using his entire budget.
6. The slope of the indifference curve is called the marginal rate of substitution, since it shows the maximum amount of one good that a consumer is willing to give up in order to receive an additional unit of another good at a constant level of utility. The slope of the budget line depends on the ratio of prices of goods.
7. Consumer equilibrium is the consumption of such a set of goods that gives the consumer maximum gross utility under a given budget constraint. Geometrically, the consumer's equilibrium is at the point of tangency between the budget line and the highest available indifference curve.
8. The price-consumption curve shows all utility-maximizing consumer choices at different price levels of a good. The demand curve, constructed from the price-consumption curve, shows the quantity demanded by an individual consumer at various prices of a product.
9. The income-consumption curve reflects all combinations of goods that maximize utility and are associated with a certain level of income. The Engel curve shows the relationship between income and the quantity of goods received, keeping other factors affecting demand constant.
10. Price-consumption, income-consumption, Engel and individual demand curves vary in shape depending on the category of product. There are normal goods, inferior goods, and Giffen goods.
11. When the price of a product changes, two types of effects occur: the substitution effect and the income effect. Substitution effect - when the price of a product decreases, the demand for it, other things being equal, will increase, because the consumer will substitute it for another, relatively expensive product. Income effect - a decrease in the price of a product means that the buyer will buy the same quantity of this product for a smaller amount, and he will have more funds for additional purchases, i.e. The purchasing power of the consumer's money income will increase. The substitution effect always acts in the direction opposite to the change in the price of a product. The income effect can work in both directions.
12. Depending on the definition of constant real income, there are two approaches to distinguishing between income and substitution effects. According to the approach of E. Slutsky, the real income of a consumer is measured by the amount of goods that he can purchase with his cash income. According to the approach of J. Hicks, real income is measured by the utility of goods purchased by the consumer with his money income.
13. Demand from an individual consumer is called individual demand, and demand from all consumers in the market for a given product is called market demand. The magnitude of market demand, among other things, depends on the number of consumers in the market. The market demand curve is the sum of the individual demand curves of all buyers in the market.
Market demand is the demand for a product by all consumers (buyers) in the market for that product. The market demand function for a product is obtained by summing the demand volumes of all consumers in the market at different price levels.Market demand characterizes the total volume of demand of all consumers at each given price of a given good.
The total market demand curve is formed as a result of horizontal addition of individual demand curves.
The dependence of market demand on the market price is determined by summing the demand volumes of all consumers at a given price.
Each consumer has its own demand curve, that is, it differs from the demand curves of other consumers, because people are not the same. Some have high income and others have low income. Some want coffee, others want tea. To obtain the overall market curve, it is necessary to calculate the total amount of consumption of all consumers at each given price level.
Market demand curves tend to have a smaller slope than individual demand curves, meaning that as the price of a good falls, the quantity demanded by the market increases more than the quantity demanded by the individual consumer.
Market demand can be calculated not only graphically, but also through tables and analytical methods.
The main factors of market demand are:
Consumer income;
preferences (tastes) of consumers;
the price of a given good;
prices of substitute goods and complementary goods;
number of consumers of this good;
population size and its age structure;
distribution of income among demographic groups of the population;
external conditions of consumption;
advertising;
sales promotion;
household size, based on the number of people living together. For example, the trend towards smaller family sizes will increase the demand for apartments in multi-family buildings and reduce the demand for detached houses.
Market demand is the total demand of individual buyers.
Market supply and demand
Volume, or quantity demanded, is the quantity of a product that consumers want to purchase to satisfy their needs.The volume, or quantity of supply, is the quantity of a product that firms producing a given product would like to produce and sell.
The reduction in supply is caused by increased taxes and rising prices for resources. Volume, or quantity demanded, is the quantity of a product that consumers want to purchase to satisfy their needs.
The amount of demand is influenced by factors: the price of the product, the prices of other goods related to it, the tastes of consumers, the average income of consumers, the number of buyers, expectations of price changes.
Demand is the entire set of values of the quantity of a product corresponding to various possible values of the price of a product, all other things being equal.
If at each possible price the quantity of goods for which there is demand increases, then we say that demand has increased.
If at each possible price the quantities of goods for which there is demand decrease, then they say that demand has decreased.
The volume, or quantity of supply, is the quantity of a product that firms producing a given product would like to produce and sell.
The quantity of supply is influenced by factors: the price of the product, the price of resources used in the production of goods, the goals of the company, the amount of taxes and subsidies, the number of producers of goods.
Supply is the entire set of values of the quantity of goods offered, corresponding to various possible values of the price of the goods, all other things being equal.
The increase in supply is facilitated by an increase in the number of producers, a decrease in prices for resources, an increase in the level of technology, and subsidies to commodity producers.
The reduction in supply is caused by increased taxes and rising prices for resources.
Formation of equilibrium price.
The most important tools of marketing research are product demand and supply curves. The optimal option is the equality of the quantities of demand and supply, and they are equal at the point of intersection of the demand and supply curves.
The equilibrium price is the price at which the quantity of a good demanded by buyers is equal to the quantity of the good offered for sale by producers. All other prices are nonequilibrium.
The equilibrium price rationalizes the buyer's demand by conveying to him information about how much consumption of a given product he can expect.
The equilibrium price tells the producer (seller) how much of a good he should produce and deliver to the market.
The equilibrium price carries all the information necessary for producers and consumers: a change in the equilibrium price is a signal for them to increase (decrease) production (consumption), an incentive to search for new technologies.
Thus, the equilibrium price quite successfully serves to automatically regulate production.
Market demand price
The market as an economic mechanism, which replaced the natural economy, was formed over thousands of years, during which the content of the concept itself changed.In economic theory, the term “market” has several meanings, but its main meaning is this: a market is a mechanism for interaction between buyers and sellers of economic goods.
The relationship between buyers and sellers, i.e. market relations began to take shape in ancient times, before the emergence of money, which then appeared largely in order to service these relations.
The market serves production, exchange, distribution and consumption. For production, the market supplies the necessary resources and sells its products, and also determines the demand for it. For exchange, the market is the main channel for the sale and purchase of goods and services. For distribution, it is the mechanism that determines the amount of income for owners of resources sold on the market. For consumption, the market is the channel through which the consumer receives the bulk of the consumer goods he needs. Finally, the market is where price is determined, which is the main indicator of a market economy.
The fundamental characteristics of the market can be reduced to the following definition: the market is a system of economic relations between economic entities, which is based on exchange relations and payment for all goods and services. The market should not be understood as either a place where exchange transactions take place, although it is called a market, or trade as an activity associated with the purchase and sale of goods. When we talk about the market, we must certainly mean the entire set of structures of economic relations between economic entities, based on the principle of remuneration for the goods and services provided.
When starting to analyze the structure of the market, it should be noted that the principles of pricing are universal in nature, because in every market there are laws of supply and demand, under the influence of which the price is formed. In turn, price affects supply and demand. However, the price in different markets takes on a wide variety of modified forms. If a price operates in any commodity markets, then in the labor market it takes the form of wages, in the capital market and money market - in the form of interest, in the land market - in the form of rent.
The market as a whole is characterized by a very complex structure. The description of its structure depends on the selected classification criteria. The most important criterion is the economic purpose of objects of market relations. In accordance with this criterion, three main types of markets can be distinguished in the national market: consumer goods and services, factors of production and financial.
Market of consumer goods. The market for consumer goods and services provides a sphere of circulation through which consumer goods and services are sold.
This area ensures that the needs of various social groups, every family, every person are met. This market is most susceptible to fluctuations in supply and demand, money circulation, and inflation. The functioning of the market for goods and services requires the development of wholesale and retail trade and marketing services.
Within the market for consumer goods and services, it is necessary to distinguish the market for food products and the market for industrial or non-food products.
The market for factors of production involves the purchase and sale of resources.
Labor market. The labor market represents the purchase and sale of services from all workers, including the services of unskilled and skilled workers, and the administrative and managerial apparatus of companies.
The most important mechanism of this market is the labor exchange, where the demand for labor of various types and its supply are directly formed.
The labor exchange has information about the situation on the labor market, records the existing labor reserve and vacant jobs, organizes public works, and provides consulting assistance in employment. Labor exchanges are government agencies subordinate to labor ministries.
In the labor market, as in any other market, the law of supply and demand operates, in accordance with which the price (wages) for labor power (labor) is set. There is competition in the labor market, through the mechanism of which the most capable and enterprising workers are selected and incentives are given to improve their skills and update their knowledge.
Investment goods market. Another component of the factor market is the real capital market; it should include, first of all, goods and services for production purposes, or those goods and services that are not directly intended to satisfy the needs of the population, but are used to solve problems to meet the needs of society for necessary goods. This market is characterized by the stability of production relations, large-scale commercial operations and the long-term nature of the relationship between partners, but, as a rule, this market is associated with the solution of problems of investment and capital investment.
In this market, the objects of purchase and sale are patents, licenses, know-how (knowledge and experience), engineering, prototypes, etc. The multidimensionality and diversity of the impact of the products of this market on the condition and quality of investment goods, labor, any final goods and services determines the need to draw attention to the operating conditions of the education system, higher education and science, which, in unity with culture and spirituality, are the starting point of true social economic progress.
Information market. This market acts as a harbinger of the future state of other markets. The information market is objectively associated with providing the most diverse and multifaceted information about the state of affairs in a particular market, in order to make adequate decisions in accordance with the current situation: Therefore, the information market in its direct functional purpose comes down to providing business entities with a wide variety of short- and medium-term information character.
Land market. One of the structural divisions of the resource market is the land market. In this case, land means not just land plots for agricultural production, construction or other needs, but also the subsoil of the earth and minerals. Therefore, on the land market there are representatives of agriculture, the construction industry, industry, primarily extractive industries, and government agencies. At the same time, it would be wrong to assume that transactions related exclusively to the purchase and sale of land take place in this market; those. with the transfer of ownership of land from one hand to another. Most transactions in this market are of a completely different nature: land is leased for a certain period of time. In this case, the exclusive right of ownership remains with the owner, who realizes the economic relationship of ownership through the appropriation of rent. The new owner-tenant receives only absolute ownership rights for the term of the lease agreement, but for this he is forced to pay rent to the actual owner annually. Thus, the appropriation of land rent represents an economic form of realization of land ownership. Consequently, in the land market, rent acts as a kind of land price.
Financial system. The financial system is a system of formation, distribution and use of monetary resources in the process of social reproduction. Financial relations permeate all levels of the national economy.
At the micro level, financial funds of enterprises are formed and operate, reflecting the movement of the enterprise's monetary resources in various forms (wages, profits, taxes, loans).
At the macro level, centralized funds of financial resources play an important role. These are federal, regional and local budgets.
Stocks and bods market. The securities market is closely interconnected with the capital markets, because it represents real-life capital in titles of property - shares, bonds, bills. In fact, there is a bifurcation of capital into real and fictitious, each of which, despite mutual predetermination, receives independent movement and circulation. Real capital is the funds of enterprises (buildings and structures, machinery and equipment, raw materials and materials). Fictitious capital reflects real capital in securities; they circulate as an independent commodity and, like any other commodity, have a price, which is called the stock exchange rate.
The movement of securities causes a flow of capital from one industry and industry to another on the basis of a more profitable investment and, consequently, structural changes in the economy.
Market infrastructure. Market infrastructure is a system of specialized organizations designed to facilitate the functioning of individual markets. For example, in the markets for goods and services there is a system of wholesale and retail trade and commodity exchanges.
Commodity exchanges are formed on the basis of homogeneity and relatedness of commodity groups (for example, grain, oil, cotton exchanges). They facilitate not only the sale of existing goods, but also the organization of transactions for future deliveries of products.
Stock exchanges are organizations where acts of purchase and sale of securities are carried out: shares and bonds and their rates are set, i.e. market prices.
The banking system is part of the credit system, which includes banks, insurance companies, pension funds, funds of trade unions and other organizations with the right to commercial activity. This is a set of institutions and organizations that is capable of mobilizing, accumulating temporarily free funds and finding appropriate forms of their placement in the form of loans and investments.
Free market. There are two counterparties in the market, one of whom seeks to sell a product at a higher price (seller), and the other wants to purchase it at a lower price (buyer). The free expression of the will of counterparties is nothing more than the realization of economic interests, which boil down to maximizing the benefit gained.
For such a situation, an atmosphere of absolute equality of all market agents must reign in the market. Such market relations are characterized by the concept of “free market”, which must meet a number of requirements.
Signs of a free market. One of the signs of such a market is, first of all, free access to the market for any commodity producer and exit from it, which implies an unlimited number of its participants. In such a market there is absolutely no manifestation of monopoly - the dominance of one seller, or monopsony - the dominance of one buyer.
However, to ensure free entry and exit, it is necessary that all market agents make these decisions on the basis of complete freedom of access to comprehensive information about the market situation (price and interest levels, state of supply and demand, etc.) - This opens up for every market participant the possibility of rational behavior: freedom of choice in order to maximize benefits and minimize costs.
Another sign of a free market is the absolute mobility of factors of production, which means the availability of the ability, if necessary, to transfer capital, move material and labor resources from one industry and sphere of economic activity to another.
An important condition for the functioning of a free market is the prevention of government interference in the economic relations of market participants and the refusal to pursue one or another economic policy.
In reality, the complete fulfillment of the above conditions seems impossible. If we talk about complete freedom of competition, then it is quite obvious that it is as a result of it that some commodity producers go bankrupt, others strengthen their market positions, expand their market segment and, ultimately, can monopolize it.
A free market is an abstraction, an ideal that does not exist and cannot be achieved. A specific market is a more or less regulated market. However, it has its own self-regulation mechanism. Its main instrument, first of all, is prices, which signal the state of affairs on the market to both consumers and producers.
The most important elements of the market mechanism are demand, supply and price. As already noted, the market is a mechanism of interaction between buyers and sellers, during which they, by correlating the supply and demand of a product, determine its price.
Demand is the quantity of a product that buyers are willing and able to purchase over a certain period of time at all possible prices for this product.
In market conditions, the so-called law of demand operates, the essence of which can be expressed as follows. All other things being equal, the lower the price of this product, the higher the quantity of demand for a product, and vice versa, the higher the price, the lower the quantity of demand for the product. The operation of the law of demand is explained by the existence of the income effect and the substitution effect. The income effect is expressed in the fact that when the price of a good decreases, the consumer feels richer and wants to purchase more of the good. The substitution effect is that when the price of a good decreases, the consumer tends to substitute this cheaper good for others whose prices have not changed.
The concept of “demand” reflects the desire and ability to purchase a product. If one of these characteristics is missing, demand is missing. For example, a certain consumer wants to buy a car for 15 thousand dollars, but he does not have that amount. In this case, there is a desire, but there is no opportunity, so there is no demand for a car from this consumer.
The effect of the law of demand is limited in the following cases:
In case of rush demand caused by the expectation of a price increase;
for some rare and expensive goods, the purchase of which is a means of accumulation (gold, silver, precious stones, antiques, etc.);
when demand switches to newer and better goods (for example, from typewriters to home computers; reducing prices for typewriters will not lead to an increase in demand for them).
A change in the quantity of a good that buyers are willing and able to buy, depending on a change in the price of that good, is called a change in the quantity demanded. A change in the quantity demanded is a movement along the demand curve.
However, price is not the only factor influencing the desire and readiness of consumers to purchase a product. Changes that are caused by all other factors except price are called changes in demand. All other factors (so-called non-price) influence both increasing and decreasing demand.
Supply is the quantity of a product that sellers want and can offer to the market in a certain period of time at all possible prices for this product. The law of supply is that, other things being equal, the higher the price of a good offered by sellers, the higher the price of this good, and vice versa, the lower the price, the lower the quantity of its supply.
In addition to price, supply is also influenced by non-price factors, among which are the following:
Changes in firm costs. Reduced costs as a result, for example, of technical innovations or lower prices for raw materials lead to an increase in supply. An increase in costs due to an increase in prices for raw materials or the introduction of additional taxes on the manufacturer causes a decrease in supply;
change in the number of firms in the industry. Their increase (decrease) leads to an increase (reduction) in supply;
natural disasters, wars.
Equilibrium price. The equilibrium (market) price is set under the influence of survey and supply. At a given equilibrium price, the desire and willingness of buyers to purchase the product, as well as the desire and willingness of sellers to sell it, coincide.
The law of market pricing operates in the market, which is as follows:
1. The price on the market tends to a level at which demand is equal to supply.
2. If, under the influence of non-price factors, a change in demand or supply occurs, then a new equilibrium price will be established, corresponding to the new state of supply and demand.
Price regulation. Floor and ceiling prices. The market mechanism operates in such a way that any imbalance entails its automatic restoration. However, sometimes the balance is disrupted artificially either as a result of government intervention or as a result of the activities of a monopoly interested in maintaining monopoly high prices.
“Flail floor” is a set minimum price that limits its further reduction. A “price ceiling,” on the other hand, limits price increases.
Floor and ceiling prices can be set by the government, which regulates market pricing. For example, when implementing social policy, the state can set maximum prices for certain types of food products (price ceilings), above which sellers do not have the right to set their prices. An example of a floor price would be a ban on selling goods at prices below their cost.
Ceiling prices are lower than the equilibrium price and prevent the market price from rising to the equilibrium level. Reduced prices are usually set as a result of government policy aimed at “freezing” prices, i.e. fixing them at a certain level in order to stop inflation and prevent a decline in living standards. Shortages of goods that arise as a result of prices falling below the equilibrium level are usually dealt with by rationing demand through the introduction of a rationing system or other rationed distribution systems.
Consideration of the laws of supply and demand, as well as the principle of equilibrium price formation, allows us to draw the following conclusions:
1. In a market economy, there is a mechanism that ensures coordination of the interests of sellers and buyers in markets:
firms can expand and contract production depending on changes in demand, in other words, they are free to choose the volume and structure of output;
prices are flexible and change under the influence of supply and demand;
the presence of competition, without which the market mechanism of supply and demand will not operate.
2. If some event occurs in the market that disrupts the existing equilibrium, for example, a change in consumer tastes and a corresponding change in demand, then:
manufacturing firms will necessarily react to changes in market conditions (for example, an increase in demand will lead to an increase in the price of a given product, since demand will show producers where to direct their efforts);
The process of adaptation of producers and consumers to new conditions will begin, as a result a new market price and a new volume of production will be formed, corresponding to the changed conditions. Market demand for a product Market demand for a product is the quantity of a product that can be purchased by a certain group of consumers in a specified area, in a given period of time, in the same market environment, within the framework of a specific marketing program.
Market demand and supply are closely related: as soon as there is a demand for a product, firms begin to produce it and offer it for sale.
Market demand is functional in nature. It is influenced by many factors. Among them: demographic, general economic, socio-cultural, psychological, as well as various activities carried out under the marketing program.
Market demand for labor consists of the demand for labor on the part of all firms using hired labor. An entrepreneur needs labor not in itself, but only because it is used in the process of producing goods and services that people need. Therefore, the demand for labor is derivative in nature and depends on the marginal productivity of labor, as well as on the supply of other factors of production.
Market demand for a factor of production is the term-by-term sum of the demands for this factor of all industries. Industry demand, however, is not the sum of the demands of all firms. When determining industry demand, it is necessary to take into account that the market price of the product changes as a result of changes in the price of the production factor.
Market demand can be characterized by income elasticity of demand.
Market demand for a product is the quantity of a product that can be purchased by a certain group of consumers in a specified area, in a given period of time, in the same market environment, within the framework of a specific marketing program.
Market demand is generated by decisions made by many individuals who are driven by their needs and cash. But in order to distribute your funds among various needs, you need to have some kind of common basis for comparing them.
Market demand is the total demand of all buyers of a given product at a given price.
Market demand for insurance services is one of the main elements of the external environment: the main efforts of the market commercial activities of the insurer are directed towards it. Market demand for insurance services has economic and humanitarian aspects.
Market demand is influenced by psychological factors - the imitation effect, the effect of snobbery. There are difficulties in determining the volume of demand.
Analysis of market demand involves developing several hypotheses regarding companies or individuals - potential buyers of a specific product, and then conducting research to determine their real interest in purchasing.
How is market demand for a new product formed, what is the market segmentation and how is the new product positioned in it, what market is the target market for the new product.
Focuses on aggregate market demand.
Changes in demand for corn. The main determinants of market demand are as follows:
1) tastes or preferences of consumers;
2) the number of consumers in the market;
3) cash income of consumers;
4) prices for related goods;
5) consumer expectations regarding future prices and incomes.
Market demand function
Demand is a form of manifestation of the needs of the population, provided with a monetary equivalent. Demand does not express the entire range of needs of the population, but only that part of it that is provided by its purchasing power. That is, market demand expresses the amount of money that buyers are willing to spend to purchase the goods and services they need. It characterizes the buyer’s desire to have a product and his ability to pay for this product (that is, the ability to buy it).There is a distinction between individual and market demand. The subject of individual demand is an individual consumer who wants to purchase goods under given conditions. The volume and structure of individual demand depend on individual differences and specific desires of the buyer. Buyers vary in income level, preferences, and tastes. Individual demand reflects national, age, gender characteristics, as well as differences in level of education, lifestyle, etc. Market demand is the totality of all individual demands in a given market, or the demand for a product by all buyers (consumers).
The most important indicators of demand are the volume demanded and the demand price. The quantity demanded is the quantity of a good that consumers are willing to buy, and the price demanded is the maximum price that a buyer is willing to pay for a certain quantity of a good.
The determining factor of market demand is price. Non-price factors include the following:
1. Consumer income. As income rises, the demand for most goods increases. These are the so-called normal goods. Those goods for which demand changes in the opposite direction with respect to changes in income are called inferior goods.
2. Consumer tastes. A change in tastes and preferences that is favorable for a given product, caused by advertising, changes in fashion, causes an increase in demand for it and, conversely, unfavorable changes in consumer preferences will cause a decrease in demand.
3. Number of buyers. An increase in their number on the market causes an increase in demand. The decrease in the number of consumers is reflected in a decrease in demand.
4. Prices for related goods. There is a direct relationship between the price of one of the substitute goods and the demand for another, and an inverse relationship between the price of one of the complementary goods and the demand for the other.
5. Consumer expectations. Consumers' expectations about the possibility of higher prices in the future may motivate them to buy more in the present. Expectations of increased income may make consumers less restrictive on current spending.
6. The degree of satisfaction of the population’s needs for a given product: the higher it is, the lower the demand. Changes in each of the factors can cause a change in demand. The dependence of the volume of demand on the factors that determine it is called the demand function.
Demand in a market economy
The main economic interest of households is to maximize the utility of purchased goods. The choice of consumer goods by households shapes demand in a market economy.The market economy is the most widespread economic system in the world at the turn of the 20th and 21st centuries. and the most effective from the point of view of long-term economic development. Both countries with a new type of transition economy and traditional transition economies in developing countries are developing towards a market economy. Therefore, it is no coincidence that economics textbooks focus on analyzing the features and patterns of a market economic system. To understand the details of the functioning of a market economy, it is necessary to understand the main feature of this system. A market economy is an economic system in which fundamental economic problems - what, how and for whom to produce - are solved mainly through the market, at the center of which is a competitive mechanism for setting prices for products and factors of production. Prices are formed as a result of the interaction of demand for products and supply of products. It is the prices on the market that indicate what to produce and what resources to use.
The concept of market is the initial concept in the theory of market economics. A market is a system of relationships between sellers and buyers through which they come into contact regarding the purchase and sale of goods or resources. These contacts between sellers and buyers presuppose some kind of agreement between them, according to which an exchange takes place at a set price. During an exchange, there is a voluntary alienation of one’s property and the appropriation of someone else’s property, that is, a mutual transfer of property rights occurs.
In the market, during exchange, there is a public assessment of the goods produced. If a manufacturer sells his product, then his labor and other costs are recognized by society as meeting the needs of society. It is on the market that producers come into contact with each other, the market unites them, establishes connections between them. In the broad sense of the word, the market is a social mechanism that communicates between producers and consumers of goods and resources.
Various economic agents or market subjects can act as producers and consumers in the market. Economic agents are participants in market economic relations who own the factors of production and make economic decisions. The main economic agents are households, enterprises (firms), and the state. The position of each economic agent depends on its ownership of resources. For example, if an economic agent has only its own labor force, then its ability to influence the organization of production and income distribution is insignificant. If a market participant owns both his labor force and money capital, then he has much more opportunities to organize and manage an enterprise and distribute income.
Households, as economic agents, make decisions mainly about the consumption of goods necessary to support the livelihoods of family members. Both a family and an individual can act as a household if he lives separately and runs his own household. Ultimately, all economic resources belong to households, but they are distributed extremely unevenly among them. The vast majority of households own and manage labor. In a market economy, labor is the main commodity created within the household and offered on the factor market. Receiving income from the sale of their resources, households make decisions about the distribution of limited income to purchase various consumer goods.
Market production demand
The demand for factors of production differs markedly from the demand for ordinary consumer goods, in particular:As a rule, it is presented only by entrepreneurs, i.e. those economic entities that are able to organize the production of products;
- it is derivative, secondary, as it depends on the demand for goods that are produced using these factors;
- it depends on the productivity of a particular factor and its price, changes in production technology, and on the price level for other factors.
The demand for any factor of production can increase or decrease, depending on whether the demand for consumer goods produced using that factor of production increases or decreases.
When placing demand for factors of production, a firm seeking to maximize profits must take into account three main points:
The quantity of products produced per unit of a given factor;
- income received from the sale of manufactured products;
- costs for the consumption of a particular factor of production.
Consequently, the demand for factors of production is an interdependent process, where the volume of each resource involved in production depends on the price level not only for each of them, but also for all other resources and factors associated with it.
The market provides information about price movements for each of them. Price is one of the most important conditions for changing the elasticity of demand for each factor of production. Demand is more elastic for those factors that, other things being equal, have a lower price.
The elasticity of demand for each specific factor of production may vary depending on:
The level of income of the company and the demand for its products;
- opportunities for mutual substitution of resources and factors used in production;
- availability of markets for interchangeable and complementary factors of production at reasonable prices;
- desire for innovation, etc.
Forming an idea of demand, supply and equilibrium in the labor, land and capital markets.
The factor market is a market where resources for the production of goods are bought and sold.
Thanks to the factor market:
A) methods, techniques, ways of producing goods and services are determined;
b) prices for production factors are set;
c) the income of the owners of production factors is determined.
The efficiency of the functioning of factor markets determines the optimal use of them, and therefore the stability and balance of the economy, the productivity of the enterprise, and the satisfaction of the needs of members of society.
In the factor market, the same laws of supply and demand and the same mechanism of competitive price equilibrium apply.
The market for factors of production is isolated specific prices for the commodity-money circulation of the most important resources: labor, raw materials and land, with its natural resources.
The main function of factor markets is to ensure, through competition, their most efficient combination, i.e. one that can lead to the best results at the lowest cost.
The factor market is the area of market relations where resources necessary for production activities are sold and purchased: labor, capital and natural resources.
In the market for factors of production, it becomes clear how the necessary goods and services are produced, since various options for solving this problem are possible. The choice of a particular production method depends largely on the price of factors. Cheaper factors encourage greater use, while more expensive ones should be used more sparingly.
Types of market demand
The process of selecting target markets is based on studying such a basic indicator as market demand. Market demand is the total volume of sales in a certain market (private or aggregate) of a certain brand of goods or a set of brands of goods over a certain period of time.The amount of demand is influenced by both uncontrollable environmental factors and marketing factors, which are a combination of marketing efforts made in the market by competing firms.
Depending on the level of marketing efforts, a distinction is made between primary demand, market potential and current market demand.
Primary or unstimulated demand is the total demand for all brands of a given product, sold without the use of marketing.
This is a demand that “smolders” in the market even in the absence of marketing activities. From the point of view of the influence of marketing activities on the amount of demand, two extreme types of markets are distinguished: an expanding market and a non-expanding market; the first one responds to the use of marketing tools, the second one does not react.
Market potential is the limit to which market demand tends when marketing costs in the industry approach such a value that their further increase no longer leads to an increase in demand under certain environmental conditions. With certain assumptions, the demand corresponding to its maximum value on the life cycle curve of a product for a stable market can be considered as market potential. In this case, it is assumed that competing firms are making the maximum possible marketing efforts to maintain demand. Environmental factors have a significant impact on market potential. For example, the market potential of passenger cars during a recession is much less than during a period of prosperity.
In addition, the absolute market potential is identified, which should be understood as the limit of market potential at zero price. The usefulness of this concept is that it allows one to estimate the order of magnitude of the economic opportunities that a given market opens up. Clearly, there is a large gap between absolute market potential and market potential. The evolution of absolute market potential is determined by external factors such as income and price levels, consumer habits, cultural values, government regulation, etc. These factors, over which the company has no real influence, can have a decisive influence on market development. Businesses can sometimes influence these externalities indirectly (for example, by lobbying to lower the driving license age), but these opportunities are limited. Therefore, the main efforts of enterprises are aimed at anticipating changes in the external environment.
Next, the current market demand is identified, which characterizes the sales volume for a certain period of time under certain external environmental conditions at a certain level of use of marketing tools by industry enterprises.
Selective demand refers to the demand for a specific brand of a product; the emergence and development of this demand is stimulated by concentrating marketing efforts in a fairly narrow direction.
Another important indicator, the value of which must be determined and predicted, is the market share indicator. Market share is the ratio of the sales volume of a certain product of a given organization to the total sales volume of this product carried out by all organizations operating in a given market. This indicator is key when assessing the competitive position of an organization. This provision follows from the following: if an organization has a higher market share indicator, then it sells more of a product in a given market, therefore, it produces more of a given product, since the volume of output must correspond to the value of potential sales. If an organization produces more product, then the cost per unit of product for this organization, due to the action of a large-scale economic factor, according to which the higher the volume of output, the lower the cost, will be lower compared to other competitors. Consequently, the position of this organization in competition will be more preferable.
Indicators of demand for a number of goods, the markets of which are characterized by a limited number of suppliers (primarily oligopolistic markets), lend themselves to statistical analysis, since information is collected and published on the volumes of products sold and services provided in a variety of aspects: for international markets, markets of individual countries and regions , in the context of individual industries and enterprises. However, for many types of goods, detailed, reliable statistical information is not available. Therefore, to determine and forecast demand levels and other market characteristics, it is necessary to conduct special marketing research, the content of which will be described below.
Law of Market Demand
The market is a special system of relationships between buyers and sellers. The state of a market economy, the level and mechanism of its development are described using such basic concepts as supply and demand. Economic analysis of market conditions through the study of supply and demand models is a universal tool for studying a wide variety of problems at both the micro and macro levels.Let's consider the model of supply and demand in a competitive market.
Market demand for a product or service is an indirect reflection of people's need for that product or service. The need for a certain good reflects the desire to have it. Demand presupposes not only desire, but also the possibility of acquiring it at existing market prices.
The market mechanism makes it possible to satisfy only those needs of man and society that are expressed in the form of demand.
Demand is the effective need for any product or service.
Types of demand for goods or services:
Individual demand for a product reflects the desires and capabilities of an individual consumer,
- market demand is a summed, or aggregated, reflection of the demand for a product on the part of all potential consumers.
For practical assessment and forecasting of market demand, a wide variety of methods are used:
1. Survey or interview of buyers. Allows you to identify consumer preferences, their financial capabilities and the likelihood of making a purchase in the future. However, it does not always give reliable results due to objective difficulties that arise when conducting surveys.
2. Expert assessment of the level of demand for a product and economic forecasts regarding its dynamics. Carried out by specialists and experts in this field at the request of interested companies. It is an expensive method, however, the likelihood of erroneous forecasts and estimates remains.
3. Market experiment. It involves direct market testing of a product, under which the required situation is modeled, new parameters are set, for example, new prices, and a comparative analysis of consumer behavior in old and new conditions is carried out. Thus, dairy producers may reduce the price of certain types of their products to determine how customers will react to this and how overall sales volume will change.
Carrying out the experiment is associated with a number of problems:
Firstly, there is a risk of negative results and, as a result, a reduction in the company’s profits and sales;
- secondly, the company cannot be sure that sales volume increased as a result of the experiment, and not under the influence of other factors;
- thirdly, due to financial restrictions, the company can only afford a limited number of marketing experiments.
4.Statistical method. Based on the study of real statistical data, the relationships between demand and prices for the product of interest over a certain period of time are examined, the influence of other demand factors (such as income, prices in related markets, macroeconomic environment, etc.) is ranked. If you have a sufficiently large statistical database, you can, with a certain degree of error, calculate the demand function and predict the expected reaction of consumers to price changes.
To quantify demand, indicators such as quantity and price of demand are used.
Quantity of demand (Qd) is the quantity of goods and services that buyers are willing to purchase at a given time, in a given place, at given prices.
The amount of market demand does not necessarily coincide with the amount of market sales. For example, the government's setting of reduced prices for any product (or a ban on increasing prices in state stores) can cause a significant increase in the quantity of demand. At the same time, sales volume may turn out to be low as a result of the manufacturer’s disinterest in selling at set prices.
The amount of demand is influenced by a huge number of factors (determinants):
Consumer tastes
- the size of their income,
- prices of this and other goods on the market.
Interaction of market demand and supply
Above we looked at supply and demand separately. Now we need to combine these two sides of the market. How to do it? The answer is this. The interaction of supply and demand with each other produces an equilibrium price and an equilibrium quantity or market equilibrium.The interaction of supply and demand is a process that gives rise to the formation of a market price that satisfies both the seller and the buyer.
The market price reflects a situation where the plans of buyers and sellers in the market completely coincide, and the volume of goods that buyers intend to buy is absolutely equal to the volume of goods that producers intend to offer. As a result, an equilibrium price arises, that is, a price at a level where the volume of supply is equal to the volume of demand.
In market equilibrium of supply and demand, there are no factors either increasing or decreasing the price as long as all other conditions remain equal.
The economic systems of most countries have features of the market principle of economic organization. This determines the features of the development of society. The interaction of supply and demand in the global market is the main driving force of progress.
It occurs according to certain laws. By studying such principles of interaction between demand, supply and price, it is possible to make a forecast of future trends. By adjusting the movement of development, humanity can reduce the negative manifestations and maximize the positive aspects of the economic system.
Therefore, studying the influence of market equilibrium of demand, supply and price, their interaction is extremely important for any society.
Market concept
The modern market is a set of exchange processes between producers of goods, services and consumers. Money takes part in this process.
The market operates according to certain laws. Two centers interact on it. On the one hand, these are enterprises and organizations, and on the other, ordinary consumers.
The interaction of market demand and supply is attracting increased interest from financial services. After all, the needs of society are limitless, and production operates in conditions of limited resources.
Therefore, the relevant services constantly monitor which goods and services are in greater demand today. In order to stay in the market, enterprises produce only the most necessary products for consumers, trying to occupy their specific niche.
Market self-regulation
One of the basic principles of market organization is its self-regulation. This mechanism of functioning occurs under conditions of interaction between aggregate supply and demand.
In order to best meet the modern requirements of society, these categories are constantly studied and monitored. This requires knowledge of the principles of supply, demand and market price formation. The latter is an indicator for both producers and consumers.
The interaction of price, supply and demand influences decisions about how much to produce, in what quantities, and what products to purchase. Price influences the course of both private and global processes in the economy. It can be called one of the most important categories in the study of market laws.
Definition of demand
Demand is the desire of the buyer, as well as his ability to purchase certain products at the price set by the manufacturer. Its value is determined by the number of goods and services that a consumer can buy.
For this to happen, a person must have the desire and opportunity to buy the necessary goods in a specific place, in a certain quantity and at a set price.
This is called purchasing power. To understand the interaction of aggregate demand and aggregate supply, it is necessary to consider the behavior of each of these categories separately.
There is a certain law. If supply is constant, demand will be higher, the lower the cost of the products on the market.
Corollary of the Law of Demand
The above pattern is confirmed by a number of market phenomena.
There is the concept of a price barrier. If the price increases, a certain part of consumers, even having the desire to purchase the product, will not be able to do so. The higher the price, the higher this barrier.
Accordingly, a decrease in value leads to an income effect. Additional consumer resources are saved. Buyers will be able to spend them on other products.
The substitution effect is the choice of the cheaper one from two interchangeable goods. A decrease in the utility of a product is observed with the acquisition of each additional unit. The consumer will buy less useful services or goods only if the price decreases.
There is also the Giffen effect. This economist determined that when the cost of some product increases, its consumption increases. This is true, for example, for food, because they need food. It’s just that the amount a family spends on it will increase as the cost increases.
Definition of a sentence
The interaction of supply and demand in the market is regulated by price. If the consumer has purchasing power for a particular product, the manufacturer must take this into account. If he has the desire and ability to produce a product that people need at a set price, this is an offer.
Since resources for production are limited, it has its own quantitative expression. This is the supply quantity. It is formed according to a certain law.
If demand is constant, then when the cost of goods on the market increases, enterprises and organizations increase their supply. This counteracts the law of demand. Therefore, the mutual influence of the main driving factors of the market constrains each other.
Non-price factors influencing supply
The interaction of supply and demand, the equilibrium of which is determined by price, also depends on various types of non-price supply factors.
It is influenced by quality and assortment. The cost of raw materials also applies to such influences. The higher it is, the less the company will produce, other things being equal, goods.
In modern conditions, it is possible to increase the value of supply using an intensive approach. Scientific developments, the introduction of new technology, and automation make it possible, with a constant amount of raw materials and the value of the cost of finished products, to produce a larger number of in-demand products or provide services.
Supply is also affected by the prices of substitute products and the number of competitors. Non-price factors include subsidies, taxes and subsidies. Even in a market economy, the state, with the help of certain control levers, can influence the processes of interaction between the main economic categories.
Equilibrium price
By opposing each other, the main market categories are balanced in a certain way. There comes a moment when the quantity of goods or services coincides with the amount of products that buyers are willing to purchase. This interaction of supply and demand is called the equilibrium price.
This is the ideal state of the market. But in real conditions such a situation is rarely observed. If supply exceeds demand, a surplus of goods occurs. Otherwise, there will be a shortage of products that consumers are willing to buy.
Elasticity of demand
The interaction between supply and demand changes under the influence of various factors. Market equilibrium is more or less subject to similar influences.
To calculate the magnitude of the susceptibility of the main categories to changing conditions, the concept of elasticity is used. It is measured in the form of percentages or coefficients. Changes in demand are compared with a 1% increase or decrease in price. But the relative value of elasticity is found by comparing the current value of the indicator to its original value.
Absolute elasticity occurs when, with a slight change in price, there is either a complete decrease or an infinite increase in the indicator. Inelastic demand does not change when price changes.
Elasticity rules
The interaction of supply and demand under the influence of various factors is subject to a number of rules.
If a product has many competitors or substitutes, its demand will be elastic. This indicator is also affected by the cost of production. Demand will be more elastic for expensive goods than for cheap ones.
The length of the period over which price changes are observed also affects the degree to which market categories are exposed to new conditions. The longer this period of time, the more elastic the demand.
For essential products, price changes have minimal impact. Such goods include water, bread, salt, and medicines. In the family budget, spending on these goods will increase while the level of consumption remains unchanged.
Having studied the interaction of supply and demand, we can conclude that the well-being of society depends on their balance. They set the rules for the functioning of the market. To avoid a deep crisis, the state must, to a certain extent, direct the ongoing processes.
Market demand for labor
We will begin our discussion of wages and salaries with an analysis of the demand for labor. The demand for labor is the inverse relationship between the price of labor (the hourly wage rate) and the total amount of labor demanded. As with all resources, the demand for labor is derivative, that is, derived from the demand for finished goods and services that are made from the purchased resources. Labor resources satisfy consumer demands not directly, but indirectly - through the production of consumed goods and services. Of course, none of us wants to directly consume the labor services of a software engineer, but we need a software product in the creation of which this engineer participates.The derivative nature of the demand for a labor resource means that the amount of demand for any resource depends on the productivity of use of this resource, that is, its ability to produce goods or provide services, as well as on the price of goods or services produced or provided using this resource. In other words, the resource that is used most efficiently in the production of a good is highly valued by society and is in great demand. Conversely, demand for a relatively unproductive resource that produces a good that is not in high demand among households is sluggish. And of course, there will be no demand for a resource from which a product is produced that is not in demand at all, no matter how productive this resource itself may be.
Market demand for labor
We have already described the characteristics of the market demand curve for labor for an individual firm. Recall that the total, or market, demand curve for a product is constructed by adding horizontally the demand curves of individual buyers for that product. In a similar way, you can construct a market demand curve for any resource. Economists add up the individual labor demand curves of all firms that employ a particular type of worker to arrive at the total market demand for that resource.
Changes in labor demand
What leads to a change in the demand for labor, that is, to a shift in the demand curve? The fact that labor demand is derived from and determined by product demand and resource productivity suggests that there are two main “shifters” of the resource demand curve. In addition, our analysis of how changes in the prices of other products can shift the demand curve for a product leads to the assumption that there is another similar factor - changes in the prices of other inputs.
Total Market Demand
Total market potential (total market demand) is the maximum sales volume of all companies in an industry over a given period of time, given the level of marketing expenditures and environmental conditions.The total market potential is usually calculated using the formula:
Q = n x q x p
where Q is the total market potential;
n – the number of buyers of a specific product under certain conditions;
q – average number of purchases for a certain period (per year);
p – average price per unit of goods.
For example, if it is known that 10 million people. buy an average of 8 CDs per year at an average price of 60 rubles, then the market potential will be equal to 4.8 billion rubles. (Q=10 million x 8 x 60 rubles).
Overall market demand changes as the underlying variables that determine it change. By knowing the overall market demand, a company will be able to determine what the demand for its product will be and how it will change, regardless of marketing expenses.
One option for determining total market demand is the chain substitution method, which involves multiplying the base number by an adjustment expressed as a percentage. For example, out of 10 thousand people, 60% plan to buy a car, of which 80% would like to buy a foreign-made car, but only 30% of this number have income sufficient to purchase. Based on these data, it can be determined that the number of those who will be able to make a purchase will be equal to 10 thousand x 0.6 x 0.8 x 0.3 = 1.4 thousand people. If a commercial company plans to sell 2 thousand cars, then it must pursue a more effective marketing policy to attract buyers.
Market potential of the region. Companies often face the problem of choosing the most profitable territories from the point of view of product sales and the optimal distribution of the marketing budget between them. To make a decision, it is necessary to assess the regional market potential, i.e. market of various cities, regions, countries. There are two methods for assessing regional market potential: the market modeling method, which is used by companies producing industrial goods, and the multifactor method, used to analyze the market for consumer goods.
The modeling method consists of identifying all potential buyers in each market and assessing their possible purchases. For example, a manufacturer of industrial equipment to assess the market potential in a given region first determines the number of enterprises that use this equipment. Then he calculates the need of each of them for this equipment per 1 thousand employees or per 1 million rubles. sales volume. So, if there are five enterprises in the region with an annual sales volume of 2 million rubles. and the need for 3 units of equipment for 1 million rubles. sales, then the regional market potential will be equal to 5 3 2 = 30 units. equipment. If the potential of all markets is 300 units, then the potential of this market is equal to 10% of the total potential. This may justify a company dedicating 10% of its total marketing spend to the region.
Multifactor method. In the consumer market, it is impossible to identify all potential buyers, so an index (multifactor) method is used to assess market potential. Companies develop an index that takes into account many factors, each of which is assigned a certain weight. For example, the consumer purchasing power index might look like:
Formation of market demand
Speaking about the factors of formation and change in demand and its values corresponding to different price levels, we have not yet distinguished between two approaches to this problem.The first of them was related to how the demand of each individual buyer is formed (this is where, for example, the problems of subjective assessment of the usefulness of a product relate).
The second aspect is the formation of demand throughout the entire market for goods of a certain type or the economy as a whole (this, for example, includes the demographic factor).
Now it is precisely this aspect that we will pay attention to in order to understand the logic of the market and the patterns of formation of demand quantities more deeply.
First of all, we need to draw a line between individual and market demand.
Individual demand is the demand placed on the market by an individual buyer.
Market demand is the total demand presented in the market by all buyers.
The formation and change in the values of market demand and market demand as a whole (other conditions being constant) significantly depend on:
1) the number of buyers;
2) differences in their incomes;
3) the ratio of the total number of buyers of persons with different income levels.
Under the influence of these factors, demand can either increase or decrease (the demand curve will shift up to the right or down to the left), or change the patterns of its formation.
This meant that the bulk of buyers were able to buy only cheap goods. But they were no longer on the market due to a sharp rise in prices and the rapid rise of inflation. As a result, Russians lost the opportunity to buy many types of consumer goods for several years. Domestic producers were unable to sell their products and found themselves in an extremely difficult financial situation.
Analyzing this situation in the Russian economy, we have come close to the concept of aggregate demand.
Aggregate demand is the total quantity of final goods and services of all types that all buyers in a country are willing to purchase over a certain period of time at the current price level.
The amount of aggregate demand is the total amount of purchases (expenses) made in a country (say, in a year) at the price and income levels that have developed in it.
Aggregate demand is subject to the general laws of demand formation, which were discussed above, and therefore it can be depicted graphically as follows.
The aggregate demand curve shows that with an increase in the general price level, the amount of aggregate demand (the total amount of purchases of goods and services of all types in all markets of a given country) decreases in the same way as in the markets of individual ordinary (normal) goods.
But we know that if prices for individual goods rise, consumer demand simply switches to analogous goods, substitute goods, or other goods or services. At first glance, it is not clear how the overall demand for all goods and services can decrease, since there seems to be no switching of consumer spending here.
Of course, income does not disappear anywhere. The general patterns of buyer behavior are not violated in the aggregate demand model. They just appear here in a slightly special way.
If the general price level in a country rises significantly (for example, under the influence of high inflation), then buyers will begin to use part of their income for other purposes.
Instead of purchasing the same amount of goods and services produced by the national economy, they may choose to use some of their money to:
1) creation of savings in the form of cash and deposits in banks and other financial institutions;
2) purchasing goods and services in the future (i.e., they will begin to save money for specific purchases, and not in general, as in the first option);
3) purchase of goods and services produced in other countries.
Demand in the market mechanism
The market mechanism is a mechanism for the relationship and interaction of the main elements of the market: demand, supply, price, competition and the basic economic laws of the market.These elements are the most important market parameters that guide producers and consumers in their economic activities in a market economic system. This is the core of market relations, the core of the market.
The market mechanism operates on the basis of economic laws: changes in demand, changes in supply, equilibrium price, competition, cost (value), utility, profit, etc.
On the production side there is supply, on the consumption side there is demand. These two elements are inextricably linked, although they oppose each other in the market. They can be compared to two forces acting in opposite directions. Depending on the specific market conditions, supply and demand are balanced for a more or less long period. This equalization of supply and demand can occur spontaneously and under the regulatory influence of the state.
It is important to note that the market mechanism manifests itself as a coercive mechanism that forces entrepreneurs, pursuing their own goal (profit), to function, ultimately, for the benefit of consumers.
The action of this mechanism is based not on persuasion, but on a person’s natural desire for well-being. Therefore, to implement the market mechanism, nothing is needed other than the freedom of producers and consumers. The more complete the freedom, the more efficiently the self-regulation mechanism of a market economy functions.
In the market, sellers and buyers make exchange transactions at their own peril and risk. Everyone is afraid of making a mistake, being deceived, or incurring losses. Everyone wants to sell at a higher price and buy at a lower price. The risk is expressed in the fact that the commodity producer seeks to predict demand, shape it and release products at high prices when the market is not yet saturated. At this time, he risks being left behind by competitors, investing money in the production of unpromising goods, producing more goods than the market requires, and selling the goods for next to nothing. Thus, various kinds of conflicts spontaneously arise in the market, which are resolved through the market mechanism. The economic situation of producers and consumers, sellers and buyers depends on market conditions, which change under the influence of numerous factors.
Market conditions are the totality of economic conditions prevailing on the market at any given moment in time, under which the process of selling goods and services is carried out.
Before moving on to a detailed examination of the elements and laws of the market mechanism, we note that the market mechanism itself contains elements of: 1) self-development and 2) state regulation through the state’s influence on demand, supply, prices and competition.
The peculiarity of the market mechanism is that each of its elements is closely related to price, which serves as the main instrument influencing supply and demand. Let's take a closer look at this dependence.
Demand for a product or service is the desire and ability of a consumer to buy a certain quantity of a product or service at a certain price in a certain period of time.
There are:
Individual demand is the demand of a specific subject;
market demand is the demand of all buyers for a given product.
Quantity demanded is the quantity of a good or service that consumers are willing to buy at a certain price during a certain period of time.
A change in quantity demanded is a movement along the demand curve. Occurs when the price of a product or service changes, all other things being equal.
Law of demand: other things being equal, as a rule, the lower the price of a product, the more the consumer is willing to buy it, and vice versa, the higher the price of the product, the less the consumer is willing to buy it.
Factors influencing demand:
Consumer income;
tastes and preferences of consumers;
prices for interchangeable and complementary goods;
inventories of goods from consumers (consumer expectations);
product information;
time spent on consumption.
If other factors change and the price of the product remains constant, the demand itself will change. As a result of changes in demand, consumers are willing to buy more (or fewer) goods than before at the same price, or are willing to pay a higher price for the same quantity of goods.
Market demand analysis
The ultimate goal of producing and selling any product or service is to make a profit by satisfying consumer demand. To successfully compete in the market, a commercial organization must conduct a systematic analysis of demand.Analysis of market demand does not consist only in identifying the goods or services most in demand by the buyer. This is a comprehensive study that helps identify key buyer groups, their preferences and behavior, as well as identify key market trends. An important analytical part is making a forecast for the future.
High-quality marketing research and timely management decisions allow us to create an assortment that ideally responds to consumer requests.
Product demand analysis
Demand is the need of society for a certain good, secured by monetary funds. The volume of demand is expressed in the largest quantity of this good (good) that the buyer is willing to purchase at a certain price for a fixed period of time.
Market demand is the volume of sales in the market of a product of a certain brand or group of products for the time period under consideration. The commercial result of the company depends on this indicator; for this reason, analysis of demand for products is the main element of marketing research.
Marketing demand research is needed to obtain answers to the main questions that interest company managers:
What products to produce?
Who should I sell to?
At what price?
Consumer demand is constantly changing and requires regular monitoring to ensure timely updating of the assortment.
When conducting marketing research, several forms of demand are distinguished:
Realized demand is the fact of a completed purchase. An indicator of such demand is the volume of retail sales. This is one of the main sources of information for analysis.
Unsatisfied demand is that part of the stated desire to purchase goods that was not translated into purchase due to the lack of goods, inflated prices or poor quality (for example, expired expiration date). It is very important to record and take into account unmet demand in the quantitative and structural assessment of demand.
Emerging demand is the demand for goods that are just entering the market. Its volume is assessed through tastings, surveys, exhibitions, etc.
Excessive demand is inherent in scarce goods.
Depending on the type of demand under consideration, various methods of collecting information and assessing it are used. To obtain a complete picture, a comprehensive analysis of both realized and other forms of demand is required.
The willingness of buyers to choose a particular product is influenced by many factors that determine the volume of demand. Main demand factors:
Product quality;
the price of the product and of related and interchangeable goods;
market saturation;
income of the population;
total population;
socio-cultural characteristics of the population;
consumer expectations and preferences;
seasonality of the product, fashion, etc..
The dependence is not obvious, some factors may have a greater influence than expected, and demand itself is actively formed with the help of trade advertising. The main instrument that keeps the balance of supply and demand is the price of the product.
Demand Analysis Methods
The methods used to study demand differ depending on the type of demand being studied.
To analyze realized demand, the sales accounting method is used. Depending on the frequency, the following types are distinguished:
1. Permanent or continuous accounting gives the clearest picture of existing trends and the structure of demand for the analyzed product (group of goods). But it requires a lot of time and labor resources, as well as the use of special computer programs.
2. Periodic accounting is carried out by calculations based on the balance of goods at the beginning and end of a certain period, as well as income and expense documentation.
3. One-time accounting is used to track the degree of dependence of sales on a specific factor (price, type, brand).
The methods for analyzing unmet demand are as follows:
1. registration of customer requests for goods that were not in stock;
2. recording the presence or absence of the product under study, which is part of the regular assortment of the retail outlet.
Based on the analysis of both of these points, it is possible to obtain generalized data on demand that has not been satisfied.
Methods for analyzing demand that is just emerging are surveys, conferences, exhibitions and sales, tasting events, as well as monitoring sales of a new product.
Market demand assessment should be carried out comprehensively, involving all acceptable methods. Since the product sold is only part of the demand, other forms of demand need to be explored.
Marketing research is carried out with the aim of increasing profits and minimizing the risk associated with lack of demand for products. The success of decisions made based on demand analysis largely depends on the quality of marketing analysis.
Market demand theory
Investigating the problems of measuring utility and mathematical determination of equilibrium, the English economist F. Edgeworth at the end of the 19th century. proposed the apparatus of indifference curves. The indifference curve concerns consumer bundles of goods, as it is a tool for analyzing consumer preferences. According to the scientist, such curves should represent the locus of points characterized by the same level of utility. However, in the concept of F. Edgeworth, the apparatus of indifference curves played a relatively small role. Such curves were also used by V. Pareto, and he interpreted them differently: he proposed to see in them simply a reflection of certain predetermined tastes and preferences of the consumer.Over time, utility theory lost its edge and was reduced from quantitative to ordinal utility, and from ordinal to revealed preference. The concept of general equilibrium also virtually disappeared because it was considered too mathematical, abstract and impractical. It was revived by J.-R. Hicks. Exploring the problems of general equilibrium in the goods market and the money market in his work “Cost and Capital,” he used indifference curves as the main means of analysis. The main goal of this study was to derive the law of market behavior, that is, the law that determines the consumer's response to changes in market conditions. Analyzing the characteristics of demand curves, J.-R. Hicks showed that the initial postulates of A. Marshall's marginal analysis were unrealistic: it is not difficult to show, for example, that predictions about the constant marginal utility of money are actually equivalent to the statement that a change in a consumer's income does not affect the size of his demand for any goods. J.-R. Hicks chooses as the center of his research certain and clear market categories - the quantity of goods purchased, its price, the buyer's income, etc.
Hicks John Richard was born in Warwick (England). Studied at Clifton College and Balliol College (Oxford). He taught at the London School of Economics (He was awarded the degree of Doctor of Science), then did research at Gonville and Keyes College in Cambridge, and later became Professor of Political Economy at the University of Manchester. J.-R. Hicks, in collaboration with his wife V. Hicks and L. Rostes, wrote the book “Taxation of War Wealth”, and subsequently (again together with V. Hicks) the work “Criteria for Local Government Expenditures” and “The Burden of Taxes levied in Great Britain by Local Authorities authorities", which examine the most pressing issues of the functioning of local budgets in England in a war economy. He worked at Oxford: first as a research fellow at Nufield College. And before retiring - as Professor of Political Economy at a local university.
The greatest contribution of J.-R. Hicks' contribution to the modern theory of money is his work "Critical Essays on the Theory of Money". Author of the works "Methods of Dynamic Economics". He also published the monographs “Money, Interest and Wages” and “Classics and Contemporaries”.
Emeritus Professor at the University of Oxford, he has been awarded honorary degrees from many universities. In honor of his and J. Tinbergen's great services to economic science, the European Economic Association established the Hicks-Tinbergen Medal. Nobel Prize Laureate.
Establishing a “cleansing” of theoretical concepts accumulated by Western theories of value by that time, J.-R. Hicks proposed to completely abandon the use of the principle of diminishing marginal utility, and to apply the principle of diminishing marginal rate of substitution to describe the market behavior of consumers. Using the apparatus of indifference curves, the scientist was able to clearly and clearly distinguish between the substitution effect and the income effect (the demand curve in A. Marshall’s interpretation reflected only the substitution effect, because he remembered only the fixed marginal utility of money, equivalent to the absence of the income effect). Separate theoretical analysis of the substitution effect and the income effect makes it possible to limit the impact that relative price fluctuations have on individual demand from the impact associated with changes in real income. This distinction is widely used in theoretical and applied economic research.
Algebraic expressions characterizing price changes and the substitution effect have opposite signs: an increase in prices is always associated with a reduction, and a decrease is always associated with an expansion of demand. In some works these effects are called "Hicksian".
The income effect depends on the nature of the income distribution and on the social consumption pattern. For example, a significant increase in real income can lead to a reduction in demand for low-quality and cheap goods (negative income effect); if, on the contrary, the consumption of this product was previously limited only by a lack of income, then with an increase in the amount of money the consumer has, its purchase may increase (positive income effect). Since the costs of the product highlighted on the indifference map (curve) are, according to J.-R. Hicks, only a small part of the total cost, then the income effect, according to such reasoning, should be relatively small.
An analytical description of these effects was contained in the work of the founder of the Ukrainian economic and mathematical school E. Slutsky “Towards the Theory of a Balanced Consumer Budget,” which was published almost twenty years before the publication of the article by J. R. Hicks and R. Allen “Once again on the theory of value " While working on the book “Cost and Capital,” Hicks deeply studied the research of E. Slutsky. Paying tribute to our fellow countryman, he noted that it was the Ukrainian scientist who is the founder of the basic level of value, which shows how a change in the price of a certain product affects an individual’s demand for another product.
Under normal conditions, the substitution effect and the income effect operate in the same direction. But sometimes a situation may arise when, firstly, the negative effect of income is expressed quite sharply and, secondly, a significant part of the total income is spent on a certain product. Then the negative income effect will dominate the substitution effect and can lead to a paradoxical, at first glance, situation when a decrease in the price of a product will lead to a reduction in demand for this product. Such situations, in particular, include the “Giffen paradox” mentioned by A. Marshall.
Based on the analysis of indifference maps, J.-R. Hicks derives curves that separately characterize the dependence of consumption on prices and on income. The configuration of these curves is determined by equilibrium conditions - the points at which each time the budget lines touch the corresponding indifference curves. The curves of the dependence of consumption on prices and income should, according to the author’s plan, combine indifference maps with an analysis of specific characteristics of market demand. Having identified the dependence of consumption on prices, one can, for example, draw conclusions about the elasticity of demand with respect to prices, and the dependence of consumption on income characterizes the influence of the income effect. However, the price level depends not only on demand, but also on supply, and the volume of production over a certain period is directly related to production costs. The equilibrium conditions in this area are often similar to the relationships formulated in the theory of demand: the equality between the price ratio and the marginal rate of substitution corresponds to the equality between the price ratio (for the corresponding factor of production and the finished product) and the marginal rate of transformation, and the principle of a decreasing marginal rate of substitution is replaced by the principle diminishing productivity of factors of production. Added to this is the prediction that, after a certain point, average expenditures should tend to increase.
The interaction between market demand and supply of goods will inevitably entail changes in the price structure (which means, ceteris paribus, a change in the slope of the tangent to the indifference curves), and this, in turn, implies a transition to new relationships both in the sphere of consumer demand and sphere of production. The process will continue until an equilibrium price structure is established.
An important part of the work “Cost and Capital” is a theoretical analysis of the principles of the transition from individual values to aggregate statistical indicators. J.-R. Hicks argued, in particular, the following relationships: if the prices of a number of dissimilar goods change in the same proportion (if their relative prices continue to maintain their previous values), then the aggregate demand for these goods, from a formal point of view, has the same characteristics that are inherent in the demand for any of the goods that form the set under study. P.-E. Samuelson (“Fundamentals of Economic Analysis”) considers this conclusion to be the most important theoretical result.
J.-R. Hicks, in “The Theory of Demand Revisited,” sought to develop a more general theory of demand, devoid of the limitations associated with the use of indifference curves. In particular, he missed some of the previous restrictions due to the fact that now only the existence of individual points is assumed that characterize the indifference of the buyer when choosing between certain quantities of two goods or two sets of goods.
In the 19th century Robert Giffen, during the famine in Ireland, put forward a hypothesis according to which the demand curve for the lowest good (potatoes) is increasing, that is, the consumption of potatoes increases with a decrease in income, ceteris paribus, accompanied by the rejection of other products. But no records of such a prediction by G. Giffen have been found.
J.-R. Hicks introduces the concept of “marginal estimates” (estimates of the maximum increment of a purchased product) and “average estimates” (the average price acceptable to the buyer for a certain number of goods). Marginal and average rating curves are becoming an important means of characterizing consumer market behavior. Thus, while maintaining the income of buyers at a constant level under perfect competition, the marginal valuation curve, according to the author, behaves approximately like an ordinary market demand curve.
One of the factors that prompted J.-R. Hicks's review of early views was the rise of revealed preference theory in the first post-war decade. Its influence turned out to be, in particular, in the fact that the scientist pays much less attention to the attitude of indifference and notes the identification of an individual school of advantages and the analysis of the conditions for the consistency of advantages. In the modified version of demand theory, the advantage hypothesis dominates because it is the advantage relationship that has been directly observed and tested.
The scientist proposed the terminology of economic research (the so-called analysis of the demand effect and the substitution effect has become the property of almost all textbooks). In addition, a number of the analytical techniques he described subsequently became generally accepted in Western economic literature. In particular, considering changes in the distribution of income, the scientist connected them with the processes of substitution between labor and capital and expressed an opinion about the possibility of elasticity of such substitution. Hicks introduced into scientific use cross elasticity coefficients, which show by what percentage the demand for a product will change, provided that other prices and incomes of buyers remain at the same level. If the cross elasticity coefficient is less than zero, then the goods are called complementary, if more - interchangeable, and if equal to zero - independent of each other. The characteristics of elasticity of substitution are now used in the theory of production functions; they play a significant role in modern Western theories of income distribution.
Distributed in the scientific theory of the definition of J.-R. Hicks neutrality of technical innovations. Using the apparatus of curves he developed, it is possible to simultaneously analyze the goods and money markets. The scientist turns to the theoretical concept of “demand for money,” which is especially often used by representatives of the monetary concept. The demand for money necessary to carry out business transactions cannot, according to J.-R. Hicks, play the same role that the demand for goods plays in the neoclassical theory of price. In “Critical Essays on Monetary Theory,” he notes that the demand for the money necessary to purchase goods and services depends on the volume and characteristics of the transactions concluded (cash purchases, the possibility of deferred payment, etc.).
Developing general equilibrium models, J.-R. Hicks successfully developed the neoclassical theory of optimal behavior of consumers and competing firms - the functions of market supply and demand coincided with predictions about the behavior of participants in the economic process.
Thanks to Hicks, the theory of demand was cleared of the remnants of psychologism associated with the concept of “marginal utility” and began to operate with marginal rates of substitution. In addition, he began developing a theory of sustainability of a competitive economy; in the work “Cost and Capital” he resolved the main conflict between the theory of the business cycle and the theory of general equilibrium. This book was distinguished by the breadth and consistency of its theoretical analysis for the first time since A. Marshall J.-R. Hicks tried to systematically analyze the foundations of neoclassical theory, so it seemed like a classic work in many countries. The merit of the Nobel laureate is laying the foundations of the modern theory of general equilibrium. Studying the general equilibrium system, the scientist sought to highlight, first of all, the problem of stability of the economic structure under consideration. Changes in the price system, in his opinion, should be determined by the conditions of stable equilibrium of the entire system.
J.-R. Hicks, trying to overcome the static nature of the equilibrium model, proposed a model of successive equilibrium states - the so-called multi-period model, in which he paid special attention to the mutual influence of the present and the future through the mechanism of price expectations. Later, within the framework of this direction, the problem of limited knowledge of economic individuals was formulated and in connection with it the concepts of “equilibrium” and “rationality” were clarified.
So, the proposed J.-R. Hicks' theory of demand determines the consumer's response to changes in market conditions: an increase in prices is always associated with a reduction, and a decrease in prices is always associated with an expansion of demand. The interaction between market demand and the supply of goods will inevitably lead to changes in the price structure, and this, in turn, determines the transition to new relationships both in the sphere of consumer demand and in the sphere of production. The process will continue until an equilibrium price structure is established.
One of the key concepts of a market economy and the basic parameter characterizing the behavior of consumers (buyers) is demand. Demand is a form of expression of need, the willingness of buyers to pay a certain price for the goods and services they need at a certain point in time.
Demand can also be defined as the effective public need for goods and services.
Demand is a desire, backed by monetary potential, the intention of consumers to purchase a product.
The main characteristic of demand is its magnitude or volume. The quantity demanded is a flow that varies over time. For many goods, demand is subject to seasonal fluctuations, so it is important to clearly determine to what period of time a given amount of demand relates.
Quantity demand is the quantity of a good that a consumer is willing and able to purchase at a certain price during a certain period of time.
In economic theory, it is customary to distinguish between individual, market and aggregate demand.
Individual demand is the demand of an individual buyer for a specific product.
The amount of individual demand is determined by the tastes and preferences of the individual, as well as his level of income.
Market demand is the total demand of all buyers in a given market.
The amount of market demand depends, first of all, on the number of buyers, the level of prices for goods and services, the level of income of consumers and other factors.
Aggregate demand is the demand in all markets for a particular product or for all manufactured and sold goods.
All transactions in the market are carried out at the demand price, which determines the willingness of buyers to pay for a product or service.
The demand price is the maximum price that buyers are willing to pay for a certain quantity of a good or service at a given time in a given market.
Demand for goods and services depends on a number of factors (determinants), which include:
♦ price for a given product or service (P);
♦ consumer income (I), which determines the size of the consumer budget. For the overwhelming group of quality goods (called normal), an increase in income causes an increase in demand at the same prices and a corresponding shift of the demand curve to the right;
♦ prices for substitute goods that replace these goods in consumption (P s). Substitute goods are, for example, tea and coffee, railway and airline services. An increase in the price of substitute goods leads to an increase in demand for the main product;
♦ prices for complementary goods that complement these goods in consumption (P s). Complementary goods are, for example, gasoline and cars, sugar and berries. A change in prices for complementary goods leads to a unidirectional change in demand, i.e. when the price of any of the complementary goods rises, the demand for both falls, and when prices fall, it simultaneously increases;
♦ tastes and preferences of buyers (Z), determined by fashion, traditions, habits, etc. For example, the periodically established fashion for miniskirts leads to a decrease in the demand for fabrics. Consumer preferences and their changes are influenced by family and social status, age, gender, the stability of national traditions, technical progress (for example, the demand for records was practically “killed” by the spread of compact discs);
♦ total number of buyers or market size (N). With an increase in the number of consumers, the volume of demand for goods or services increases, a decrease in the number of buyers leads to a fall in demand;
♦ customer expectations, including inflation (W). Expectations of rising prices may cause an increase in demand for goods in
worthwhile time. Expectations of reduced income (during a crisis) may lead to a reduction in demand;
Taking into account all these factors, the overall demand function can be represented as follows:
Demand function is a quantitative relationship between the amount of demand and its determining factors (determinants).
If all demand factors, except price, are taken unchanged for a given period, then we can move from the general demand function to the demand function from price: 
where is the quantity of demand for product i;
Price of the analyzed product i.
The inverse dependence of price on demand is called the inverse demand function and has the form
For practical assessment and forecasting of market demand, a wide variety of methods are used. The most commonly used:
♦ survey, or interviewing buyers about their preferences and financial capabilities;
♦ expert assessment of the level of demand for a product and economic forecasts regarding its dynamics - carried out by specialists and experts in this field at the request of interested companies;
♦ market experiment - involves direct market testing of a product (trial sales, trial price reduction, etc.) and assessment of consumer behavior;
♦ statistical method - based on the study of real statistical data, the relationships between demand and prices for goods for a certain period of time are studied, the influence of other demand factors (income, prices for other goods,
macroeconomic situation, etc.).
If there is a sufficient volume of statistical database, it is possible, with a certain degree of error, to calculate the demand function and predict the expected reaction of consumers to price changes.
The functional relationship between the quantity demanded and the price can be represented in three traditional ways: tabular, analytical (through an equation) and graphical. A graphical representation of the dependence of the quantity demanded on the market price is carried out using a demand curve.
Demand curve is a relationship presented in graphical form between the amount of demand for a product and its market price, with other (non-price) factors affecting demand constant.
On the demand curve, P is displayed vertically - possible prices, and horizontally Q - the quantity of goods purchased. The dependence of demand on price can be linear (Fig. 3.1, a) or nonlinear (Fig. 3.1, b).
Rice. 3.1. Demand curve: a - linear dependence; b - nonlinear dependence
The demand curve has a negative slope and graphically displays the law of demand - the inverse relationship between the price and the quantity of a good that buyers want and can purchase per unit of time.
I Law of Demand - the higher the price of a product, the lower the quantity of demand for it, all other things being equal.
A change in the price of a product gives rise to two effects: the substitution effect and the income effect.
Substitution effect is a change in the quantity of demand for a product as a result of the substitution (replacement) of more expensive goods with less expensive ones.
The essence of the substitution effect is that the consumer will buy more of a product whose price has decreased, replacing it with a product whose price has increased. Thus, an increase in the price of coffee leads to an increase in tea consumption.
Income effect is the effect that a change in the price of a good has on the consumer's real income and on the quantity of the product he purchases, taking into account the substitution effect.
The essence of the income effect is that when the price of a product decreases, the buyer frees up a certain part of his income, which he can now use to purchase either more of this product or some other product. Even small price reductions make buyers (consumers) relatively richer, indirectly increasing their real income.
When the price of a good changes, the quantity demanded moves in the opposite direction along the demand line (Fig. 3.2, a). If non-price factors of demand change, this leads to a shift of the demand curve itself (Fig. 3.2, b) to the right (with an increase in demand) or to the left (with a decrease in demand).
As follows from Fig. 3.2, when the price decreases from P 1 to P 2, the volume of demand increases from Q 1 to Q 2 (see Fig. 3.2, a). When the price increases, the dynamics of the quantity demanded will be reversed.
If the non-price factor changes, then a new relationship between price and quantity demanded will be established, the demand function on price will change and the demand curve will shift. For example, with an increase in the number of consumers or the amount of their income, the demand line will shift from position D 1 to position D 2 (see Fig. 3.2, b). In this case, at price P 1, the quantity demanded will increase from Q 1 to Q 3, and at
price 
It is obvious that if it subsequently happens
a reduction in the number or income of buyers, it will cause an opposite reaction on the part of demand and the curve will shift from position D 2 to position D 1.
Rice. 3.2. Change in the volume of demand and shift in the demand curve: a - change in price - movement along the demand curve; b - change in non-price factors - shift in the demand curve
To avoid confusion, it is customary to understand the term “change in demand” as a change in the function itself (a shift in the entire demand curve) under the influence of non-price factors, and the term “change in the quantity of demand” to understand the reaction of demand to a change in price with all other factors remaining constant (movement along the demand curve) .
It should be noted that from the point of view of the dependence of the magnitude of demand on the level of income in economic theory, it is customary to distinguish between normal and abnormal goods.
A normal product is a product for which demand increases as consumer income increases.
Consequently, in relation to normal goods, there is a direct dependence of the amount of demand on the amount of consumer income.
An abnormal product is a product for which the demand decreases as the consumer's income increases.
Demand for abnormal goods increases when consumer incomes fall. Abnormal goods include, for example, margarine, cheap pasta, which, as incomes grow, buyers replace with higher quality goods: oil, vegetables, fruits. Thus, during a period of sharp decline in income levels in the 90s, people began to consume more bread and potatoes (i.e., increased demand for abnormal goods) and reduced consumption of meat and fruit (i.e., decreased demand for normal goods). A sharp drop in income has forced the population of our country to increase consumption of cheap and lower-quality products. It should be noted that the dynamics of consumption of normal and abnormal food products, due to the described pattern, can serve as a reliable criterion for the standard of living in the country. The larger the share of bread, potatoes, and pasta in the population’s diet, the poorer the country. On the contrary, the greater the share of meat, milk, and fruit, the richer it is.
Demand is a solvent need for any product or service.
Quantity of demand- this is the quantity and that buyers are willing to purchase at a given time, in a given place, at given prices.
The need for some good implies the desire to possess goods. Demand presupposes not only desire, but also the possibility of acquiring it at existing market prices.
Types of demand:
- (production demand)
Factors influencing demand
The amount of demand is influenced by a huge number of factors (determinants). Demand depends on:- use of advertising
- fashion and tastes
- consumer expectations
- changes in environmental preferences
- availability of goods
- income amounts
- usefulness of a thing
- prices established for interchangeable goods
- and also depends on the size of the population.
The maximum price that buyers are willing to pay for a specific quantity of a given good or service is called at the price of demand(denote)
Distinguish exogenous and endogenous demand.
Exogenous demand - This is a demand whose changes are caused by government intervention or the introduction of any external forces.
Endogenous demand(domestic demand) - is formed within society due to the factors that exist in a given society.
The relationship between the quantity of demand and the factors that determine it is called the demand function.
In its most general form it is written as follows:
If all the factors that determine the quantity of demand are considered unchanged for a given period of time, then we can move from the general demand function to price demand functions:. The graphical representation of the demand function from price on the coordinate plane is called demand curve(picture below).
Changes occurring in the market related to the quantitative supply of goods always depend on the price set for this product. There is always a certain relationship between the market price of a product and the quantity for which there is demand. The high price of goods limits the demand for it; a decrease in the price of this product usually characterizes an increase in demand for it.
Changes in demand and quantity demanded
In the analysis, it is necessary to make a clear distinction between demand and quantity demanded, as well as between changes in quantity demanded and changes in the demand for a given product.
Change in quantity demanded observed when the price of the product in question changes and all other parameters (tastes, income, prices for other goods) remain unchanged. On the graph, such a change is reflected by movement along the demand curve from point (arrow No. 1).
Change in demand occurs when market prices for the product in question remain unchanged, i.e. under the influence of any non-price factors, and is reflected on the graph by a shift in the demand curve to the right or left (arrow No. 2).
Non-price determinants of demand
Factors that influence demand at constant prices for the product in question are called non-price determinants of demand. Among the most significant non-price determinants, economists identify:
1. Tastes and preferences of consumers. 2. Consumer income.For the overwhelming group of normal quality goods, an increase in income causes an increase in demand at the same prices and a corresponding shift of the demand curve to the right.
However, for relatively inferior goods of comparatively lower quality, an increase in income induces the consumer to replace the relatively inferior good with a better one and thereby reduces demand. As a result, the demand curve shifts to the left.
3. Number of consumers.All other things being equal, the greater the number of potential buyers, the higher the market demand for the product.
4. Prices for other goods.This factor is non-price, because assumes the price of the product in question remains unchanged. The price of any other product other than the one we are analyzing acts as a non-price or exogenous factor.
There are conventionally three groups of “other” goods:
- neutral, i.e. having an extremely low, close to zero impact on the market for the main product, for example, tea and milling machines;
- substitutes, satisfying similar needs and therefore being competitors for the main product, for example, tea and coffee;
- complementary, whose consumption is driven by the consumption of a staple good, such as tea and sugar.
If we can abstract from the first group of goods, then changes in prices for complementary and substitute goods will have a significant impact on the market demand for the analyzed product.
An increase in the price of a substitute product leads to a reduction in the quantity demanded for it and, as a consequence, to an increase in demand for the main product. (An example is the situation in the 70-80s on the oil market, when rising prices for this energy carrier provoked an increase in demand for alternative energy sources: nuclear, solar, wind energy, etc.).
On the contrary, an increase in the price of a complementary product leads to a reduction in demand for the main product, and vice versa, a fall in prices leads to its increase. Thus, the reduction in prices for printers for personal computers caused a sharp increase in demand for high-quality paper. Both examples can be illustrated by a shift in the demand curve to the left.
5. Economic expectations of consumers.Expectations may concern changes in prices, cash income, macroeconomic situation in the country, etc. Thus, expectations of rising prices (so-called inflation expectations) can cause an increase in demand for goods already in the current period of time, which will graphically mean a shift of the demand curve to the right, and expectations of a reduction in cash income (for example, due to an upcoming layoff) - a reduction in demand and corresponding shift of the demand curve to the left.
Non-price factors influencing demand include:- Changes in cash income of the population
- Changes in population structure and size
- Changes in the prices of other goods (especially substitute goods, or complementary goods)
- Economic policy of the state
- Changing consumer preferences under the influence of advertising and fashion.
The study of non-price factors allows us to formulate the law of demand.
Law of Demand. If prices for a product increase, while all other parameters remain unchanged, then demand will be for less and less of this product.
The operation of the law of demand can be explained on the basis of the action of two interrelated effects: the income effect and the substitution effect. The essence of these effects is as follows:
- On the one hand, a rise in prices reduces the real income of the consumer, while the amount of his monetary income remains unchanged, reduces his purchasing power, which leads to a relative reduction in the amount of demand for the more expensive product (income effect).
- On the other hand, the same rise in prices makes other goods more attractive to the consumer and encourages him to replace the more expensive product with a cheaper analogue, which again leads to a reduction in the amount of demand for it (substitution effect).
The law of demand does not apply in the following cases:
- (An increase in prices for the main group of essential goods leads to a rejection of more expensive and high-quality goods, and to an increase in the volume of demand for this basic product (can be observed during a period of famine). For example, during the famine in Ireland in the mid-19th century, the volume of demand for potatoes increased. Giffen is connected with the fact that in the budget of poor families, expenses on potatoes occupied a significant share. Increasing prices for this product led to the fact that the real incomes of these segments of the population fell, and they were forced to reduce purchases of other goods, increasing the consumption of potatoes, to survive and not die of hunger)
- When price is an indicator of quality(In this case, the consumer may believe that the high price of the product indicates its high quality and increased demand)
- (Connected with prestigious demand, focused on the acquisition of goods that, in the buyer’s opinion, indicate his high status or belonging to “beneficiary goods”)
- Effect of expected price dynamics(If the price of a product decreases and consumers expect this trend to continue, then the amount of demand in a given time period may decrease and vice versa)
- For rare and expensive goods that are a means of investing money.
Law of supply
The analysis will be one-sided without considering the supply, which characterizes the economic situation on the market not from the buyer's side, as demand, but from the seller's side.
Offer is a set of goods and services that are on the market and that sellers are willing to sell to buyers at a given price.
Supply quantity- this is the quantity of goods and services that sellers are willing to sell at a given time, in a given place and at given prices, but the amount of supply does not always coincide with the volume of production and sales volume on the market.
Offer price- this is the forecast minimum price at which the seller agrees to sell a certain quantity of a given product.
Volume and structure of the proposal characterizes the economic situation on the market on the part of sellers (manufacturers) and is determined by the size and capabilities of production, as well as the share of goods that are sent to the market and, under favorable economic circumstances, can be purchased by buyers. The product supply includes all goods on the market, including goods in transit.
The volume of supply usually changes depending on the price. If the price turns out to be low, then sellers will offer a small amount of goods, the other part of the goods will be kept in the warehouse, but if the price is high, then the manufacturer will offer the maximum amount of goods to the market. When the price increases significantly and turns out to be very high, manufacturers will try to increase the supply of goods, trying to sell even defective products. The supply of goods on the market largely depends on production costs, that is, those production costs that directly form the costs associated with the production process.
The proposal is examined over three time intervals:- Short-term - up to 1 year
- Medium term – from 1 year to 5 years
- Long-term - more than 5 years
Supply volume name the quantity of any product that an individual seller or group of sellers wants to sell on the market per unit of time under certain economic conditions
Suggestion function price characterizes the dependence of the volume of supply of a product on its monetary equivalent
As with demand, changes in quantity supplied should not be confused with changes in supply:Supply curve shows how many products producers are willing to sell at different prices at a given time.
- A change in the volume of supply is observed when the price of the product in question and other constant factors of market conditions change and implies movement along the supply curve (arrow No. 1)
- A change in supply, on the contrary, means a change in the entire function of supply due to a change in any non-price factors with a constant price for the analyzed product (arrow No. 2)
- Q - number of products that the manufacturer is ready to offer
- S - sentence
Non-price supply factors include:Law of supply- the quantity supplied of a good increases when the price rises and decreases when it falls.
- changes in production costs as a result of technical innovations, changes in sources of resources, changes related to tax policy, as well as characteristics that affect the formation of the cost of production factors.
- Entry of new companies into the market.
- Changes in prices for other goods leading to a firm leaving the industry.
- Natural disasters
- Political actions and wars
- Forward economic expectations
- Firms engaged in the industry, when prices increase, use reserve or quickly commissioned new capacities, which automatically leads to an increase in supply.
- In the event of a prolonged increase in prices, other producers will flock to this industry, which will further increase production and, as a fact, an increase in supply is possible.
Technological progress has a huge impact on the supply curve. It allows you to reduce production costs and vary the number of goods on the market. The analysis of the supply schedule is largely determined by the production technology used by the manufacturer, the availability and accessibility of raw materials used in the manufacture of the product. If the mobility of production and the resources used in it are high, then the supply curve will have a flatter shape, i.e. flattened down.
