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Market Mechanism

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What is market?

In simple words, it is a Place where goods and services arebrought and sold. For example chandani chowk,connaught palace etc.

In economics-A market need not be situated in a particular place or

service.

According to SAMUELSON & NORDHAUSA market is a mechanism by which buyers & sellersinteract to determine the price & quantity of a good orservice.

Sellers & buyers- individuals, firms, factories, dealers &

agents

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Features of market concept

A market need not be situated in a particular locality orarea

Buyers & sellers need not come into personal contact

with each other Word market may refer to a commodity / service or to a

geographical area

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What is market mechanism?

The market for a product works on certain marketprinciples i.e. the laws that govern the working ofthe market system, also called market mechanism

Working of the market system is governed by certainfundamental laws of market called Law of Demandand Supply.

Clear understanding of this is required for chalkingout an appropriate market strategy.

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Supply side of the market

Some important terms in this:-

Supply- It is the quantity of a commodity that itsproducers/ sellers offer for sale at a given price, per unit

of time.

Market supply- Sum of suppliers of a commodity madeby all the individual firms or their supply agencies.

Market supply of product is governed by the law ofsupply.

Supply of a commodity depends on:-

1.Its price

2.Cost of production.

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Law of supply-

Supply of a product Increase in price

And vice versa all the other factors remaining constant.

Other things technology, price of related goods, weather& climatic conditions in case of agricultural goods.

Supply schedule- A supply schedule is a tabularpresentation of the law of supply.

Supply curve- Graphical representation of supply

schedule.

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Price

Quantity supplied per unit of time

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Market equilibrium-equilibrium of demand & supply

Determination of price in a Free marketFree market is one in which the market forces of

demand & supply are free to take their own course & nooutside control on price, demand & supply

Market equilibriumRefers to a state of market inwhich

Quantity demanded = Quantity suppliedof a commodity of the commodity

Equality of demand and supply produces equilibrium PriceIt is also called Market Clearing Price because marketiscleared in the sense that there is no unsold stock and no

unsupplied demand.

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Determination of market priceIn a free market, disequilibrium itself creates thecondition for equilibrium.

When there is excess supply, it forces downward

adjustment in the price & quantity supplied.

When there is excess of demand it forces upwardadjustment in the price & quantity demanded.

Process of downward & upward adjustment in price

determines till price reaches equilibrium and thequantities supplied and demanded are in balance

This process is automatic.

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Market mechanism: How

market brings balance?Market mechanism: Process of interaction between the

market forces of demand & supply to determine

equilibrium price.1) If

Supply with demand

Then it gives sellers an opportunity to raise its price & itprepares buyers to accept & pay higher price. As resultprice goes up.

So we conclude that :-

If Supply with demand ------Prices

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2) If

Supply with demand

Excess supply forces the competing sellers to cut downthe price in order to clear their unsold stock.

Some firms find low price unprofitable & go out of the

market.

Some cut down their productivity, supply goes down

Thus we conclude that :-

If Supply with demand ------- Prices

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Quantity

Demand, Supply, andMarket Price

Price

SupplyDemand

E

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Quantity

Surplus

Price

SupplyDemand

E

Surplus

The equilibrium condition is not fulfilled at any other point on thedemand and supply curves. Therefore, there would be eitherexcess supply or shortage.

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Quantity

Shortage

Price

E

Shortage

The equilibrium condition is not fulfilled at any other point on the demandand supply curves. Therefore, there would be either excess supply or

shortage.

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Shift in Demand and Supplycurves and equilibrium

O

Quantity

D

D

D

D

P

M

Q N

S

S Shift in demandcurve andequilibrium

Price

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Quantity

S

S

D

D

P

M

Q N

S

S

Price

Shift in Supplycurve andequilibrium

P ll l hif i D d S l

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Parallel shift in Demand Supplycurve and its effect on equilibriumprice and output

Quantity

S

S2

D1

D

E1

Q1

S

S1

Price

P1

D2

P2

Q2

E2

D