Supply and demand

Market equilibrium (also cleared market ) is called in the economics of the situation in a market in which the amount of the bid is equal to the quantity demanded. This amount is referred to as the equilibrium quantity.

Since more and more buyers ( and sellers less ) are usually, the lower the price is, and the more vendors (and less demand ), the higher the price, the price acts as equilibrating variable. The price, which leads to market equilibrium is referred to as market price or equilibrium price.

The balance of price formation is a central element of the neoclassical theory and general equilibrium theory.

3.1 change in demand
3.2 change in supply

5.1 Offer anomalies
5.2 pricing anomalies

6.1 Polypol
6.2 monopoly
6.3 oligopoly

History

Attempts to determine how supply and demand are related, have their origin in the book The Wealth of Nations by Adam Smith, which was published in 1776. In this book, Smith assumed that the demand will depend on the price of the goods, but vice versa exist no influence on the price of the demand. David Ricardo published in 1817 the book Principles of Political Economy and Taxation, in which the first idea of an economic model has been proposed. In it he laid out the basic idea of the assumptions that led to the formation of the theory of the equilibrium price.

In the late 19th century the idea of the marginal price was. Founder of this new school were essentially Stanley Jevons, Carl Menger, and Léon Walras. The basic idea behind this was that the price was set by the highest price that a buyer was willing to pay, that is, the marginal price. This was a substantial improvement over the thought of Adam Smith for the determination of the offer price.

Ultimately, the combined Alfred Marshall and Léon Walras particularly their ideas about the supply and demand price and looked at the equilibrium point at which the two curves intersected. They also began to consider the effects of different markets with each other. Since the late 19th century, the theory of supply and demand has hardly undergone changes. The greatest attention is now directed to cases where market failure occurs, such as monopolies or irrational behaviors of market participants and to the consideration of transaction costs.

Assumptions and definitions

The theory is based on several assumptions that must be met for market clearing and the emergence of an equilibrium price. This condition is not strictly fulfilled, which is why there is the equilibrium price in reality rare. In a perfect market, ie a market with many small rationally acting suppliers and customers, none of which can influence the market price at its sole discretion, an equilibrium price is established. This assumption is fundamental to the simple theory of the equilibrium price, as it is taught in introductory economics courses. In many real-world markets, this assumption is not true, be it for reasons of low market transparency or because individual buyers or sellers have sufficient market power to affect the price in their favor. In such situations, the simple model of equilibrium price is insufficient and needs further investigation. Furthermore, it is assumed that no transaction costs exist, which in reality is rarely the case. Transaction costs refer to those costs incurred in addition to the actual purchase, or about the cost of the price information and the transportation costs. Moreover, no feedback can consist, for example, in the way that the level of provider and offer prices are a unit. This is for example the labor market in the case where the prices are determined by labor costs. At the same time the income is the basis, can be bought at what prices. Despite these weaknesses, the model is useful as a first approximation for the market development.

The economics devotes much attention particularly such cases in which so-called market failures, leading to a sub-optimal allocation, ie a non-optimal allocation of scarce resources. For example, a monopolist will always demand high prices, resulting in a shortage of the amount offered. In such cases, economists may attempt to find rules to prevent market failure and the resulting welfare loss to society, or at least lessen. The state could intervene for example in the form of taxes directly through legal measures ( maximum prices or minimum prices ) or indirectly through market regulation.

Demand

Demand is the amount of goods that consumers want to buy at a certain price. You can create a demand table that shows the quantity demanded at all possible prices. This table can be represented as a graph in the market or as a mathematical formula diagram. The main criteria of the price that is paid, typically the quantity of the goods, the amount of own income, personal taste, the price of substitute goods ("Replacement " ) and complementary goods. The goods " Auto" and " gasoline " for example, are complementary, since their consumption reinforced each other.

The variable demand quantity q is obtained as a function D from the independent variables p ( price), p1, p2, ..., pn ( the prices of other goods), Yv ( disposable household income ) and ED ( expectations of buyers to the market in terms of price developments etc.). Mathematically:

Offer

Offer refers to the amount to produce the generator for a certain price are ready and this also can.

Analogous to the theory of quantity demanded results in the offered amount q as functional S relationship with the independent variables p ( price), p1, p2, ..., pn ( the prices of other goods), w1, w2, ..., wn ( the cost of factors of production or service provision ), F ( the standard of production techniques ) and ES ( the expectations of the providers on the market in terms of price developments, etc.). Mathematically:

Change in demand

If more people want to have a particular good, the quantity demanded will increase at all prices, ie the demand line in the graph shifts to the right. The cause of a higher demand can be for example a new fashion, other circumstances or higher income. Due to the higher demand and the associated rightward shift of the demand curve increases the equilibrium price and the converted amount. A decrease in demand shifts the curve to the left, resulting in a lower price and lower sales volumes to be.

For example, if more people want to buy coffee, providers are initially can increase the price as more demand is there an offer. As a result of the price increase more vendors will be added or existing providers expand their offer, as it is now worth the higher price for them. This reaction of the market, a new market equilibrium with a new equilibrium price and quantity of new sales.

Conversely, if the demand decreases, the opposite happens. The demand curve shifts to the left, the equilibrium price decreases, and as a consequence will drop the offer.

Change in supply

If changed the offer, the offer of the line graph scrolls. An increase in supply shifts the line, for example to the right, which pushes the price and increases the converted amount. A sinking supply shifts the supply curve to the left. In consequence, the price rises and the quantity.

For example, if an improved, cost -effective method is introduced for the cultivation of wheat, more vendors could sell for the price offered wheat. This may lead to an oversupply of wheat. In order to sell all their wheat, providers must reduce the price. This means that the wheat for more customers, for example, Baker, is interesting, as these so favorable bread can produce and in turn sell more. As a result, a new balance in wheat market with a lower equilibrium price and a larger market volume forms.

Determination of the equilibrium price

The supply line starts with a small range at a low minimum price and increases with the price. The demand line starts with a small demand for a high maximum rate and decreases with decreasing price ever in quantity. As can be seen in these two lines, there is more and more providers and goods the higher the asking price is. Conversely, there are more and more customers who buy more and more, the lower the price is demanded for the goods. Since the price wishes of suppliers and customers are in opposite directions, turns the market equilibrium at the interface of supply and demand, which determines the equilibrium price, and the maximum of sales.

Change in demand

If more people want to have a particular good, the quantity demanded will increase at all prices. The cause of a higher demand can be for example a new fashion, other circumstances or higher income. Due to the higher demand and the associated rightward shift of the demand curve increases the equilibrium price and the converted amount.

Conversely, if the demand decreases, the opposite happens. The demand curve shifts to the left, the equilibrium price decreases, and as a consequence will drop the offer.

Change in supply

An increase in supply pushes the price and increases the converted amount. With decreasing the offer price and the amount increases decreases.

Elasticity

An important concept for understanding the equilibrium price is the price elasticity. It indicates how much a price change of a product or service on the demand effect or how much the change in demand is reflected on the price.

Anomalies

The idealized theory assumes that the entire trading takes place on the equilibrium price. This requires, first, that all market participants can watch the market any time completely. Almost always, however, only part of the overall market is appreciated by the actors. On the other hand, a trade in addition to the equilibrium price takes place, albeit with reduced revenues.

Offer anomalies

On the supply side, there are shifts because of the potential price very much on the later also sold (not just offered ) depends on quantity. A manufacturer can easily produce at the same fixed cost double the amount, so that to divide the fixed costs over a much larger amount.

About The Look of the market costs both buyers as well as suppliers not insignificant money, such as travel costs or advertising. Therefore, it is interesting for the manufacturer to sell to less demand higher quantities. At the same time buyers can combine orders so take advantage of that fact so.

Shortage of supply or demand: A market in which there are few buyers or few suppliers reacts differently than the Polypol. In both cases, market power that allows us to change the price in his favor is created. In theory it does not matter if a manufacturer is now selling more at a lower price or less at a higher price. Due to the number of units (see above) but this is not linear, but the loss of a major customer (at the same market volume ) can ruin a company, because then the market price can no longer produce. Conversely, there are few manufacturers under less competition, since all can be very effective to produce. It is more likely to price fixing or simultaneous price increases, since no one is afraid it could therefore market share will be lost.

Monopoly: There is only one manufacturer or buyers ( monopsony ), which can in principle determine the price at will. There are in this case actually only a price, but that it is no longer determined in the market. By the laws of the market then only determines the amount demanded or offered. This leads to market failure, since the available resources are not optimally utilized and the market volume is clipped.

Decoupling of supply and demand: The model assumes that arises according to the possible price and market demand. This is especially true for luxury goods, such as a CD. This one might indeed might like to have, but not for any price. A price increase for gasoline is, however, only in the long term lead to behavioral changes in response to the higher price. A certain basic demand for drinking water, there are basically even regardless of price, because no one can refrain from drinking because it is too expensive.

Pricing anomalies

At the market equilibrium, it is believed that the ruling price can buy the buyers the desired quantities and sell the provider. The assumption of continuous market clearing, however, is not realistic, because any delay would have the prices adjust to changes in supply and demand. But the prices are often fixed for several years, for example, through contracts ( collective bargaining for wages, book prices). The market clearing approach assumes that all prices and wages are flexible, but in reality there are wage and price rigidities.

A rising price on falling demand occurs, for example, in public transport, in drinking water and in small batch of previously manufactured in large series products.

At the end of the production cycle of a product or later demand falls sharply. When it is then still needed, the price is much higher than in the middle of the production cycle.

Market forms

Depending on various market forms ( Polypol, oligopoly, monopoly) gives the price in different ways. Both mono- as well Polypolisten need to consider the marginal cost curve at the market equilibrium. While the Polypolisten seek the intersection with the demand curve, the monopolist's profits reach the maximum at the intersection with the marginal revenue function. Since the marginal revenue is below the demand function is higher in the monopoly market, the price at a lower amount. This is for the buyers theoretically Polypolmarkt cheaper.

Polypol

Price formation in a polypolistic free market is through the interaction of supply and demand. Here, the price settled at a competitive market so that it supply and demand balances ( market equilibrium ). If the offer is greater than demand, so the price drops. At a lower price, customers are more willing to buy the product, but fewer providers willing to offer the estate. Demand increases and supply decreases. The price at which supply and demand are equal is called the equilibrium price.

Market participants in a Polypol take the prize as given and act as price takers. Here, at a higher price, a larger amount is offered, for example, when new entrants into the market, or the expansion of production beyond the existing volume of supply addition by increasing the productive capacity.

Depending on the market structure and market conditions, a distinction pricing example when Polypol at

Perfect competition
Imperfect competition.

Monopoly

With decreasing number of suppliers and buyers of a good and the pricing is more difficult and unsteady.

In a unilateral monopoly supplier or a purchaser intended solely the price. The demand function takes the monopolist receive as a date. He will always choose a price / quantity combination on this demand function, since it would produce when it exceeds a supply ( quantity ) income, falls below a demand ( volume ) excess.

The maximum profit for the monopolist is the Cournot point (intersection of marginal cost and marginal revenue ). This is below the maximum revenue.

In a bilateral monopoly pricing is often arbitrary.

Depending on the market structure and market conditions, a distinction pricing example in offering monopoly

Perfect competition,
Imperfect competition

Oligopoly

In the oligopoly from the profit of the reactions of others depends. When oligopoly there are few suppliers and many buyers.

The core problem of oligopoly theory is the development of realistic hypotheses about the reaction of others. For Dyopole following assumptions were made:

Cournot hypothesis: The duopolists operate independent set of strategies
The Stackelbergsche hypothesis: This anticipates unelastischerer behavior of others. In determining the gain, which is after, expected of him trimming of the second maximum.
Cooperate Camerlin - Fellnersche hypothesis Both duopolists and thus behave like a monopolist
Theory of the kinked demand curve: Competitors follow price reductions immediately, takes place at price increases no reaction
Equilibrium region solution by Krelle

Criticism

Critics of the theory of equilibrium price formation they describe as a theoretical model, which can not be universally applied (market failure).

They point among other things, actual deviations from the model assumption that a higher price to less demand, but more supply leads.

On the labor market, for example, can declining wage to higher labor supply, even from family members, cause if the work providers are trying to keep their income. According to the efficiency wage theory does not lead to a market-clearing wage, because companies pay wages that are higher than the equilibrium wage because they hope it will be a higher labor productivity of employees.

As another example, the financial markets are called, on which some players sell securities if they fall below a certain price. Conversely, the demand for securities possibly just when its price rises ( herd behavior ). Critics say is the model of equilibrium price formation therefore ( if at all) only on goods applicable, which have an intrinsic direct benefits, such as bread from the baker, and can not be " abused " as objects of speculation.

However, just shows the reality of the financial terms of the model: If the majority of the securities owners want to sell below a certain price, so the price would fall to zero. However, this is in reality only be observed if the securities from investors actually no more importance is given - rather the ready to sell securities owners find a rule to a sufficient extent prospective buyers so that sets a new ( lower) equilibrium price. Model advocates explain this behavior, therefore, entirely with the sale of new information and a consequent re-evaluation of the goods by the owner.

Despite the criticism, the model provides straight through the simplified assumptions a high explanatory power for many everyday examples of how they were also mentioned in the above sections. But it must always check whether the conditions of applicability are given. With the appropriate extensions for special market situations, it is applicable for most cases, if you let the speculation objects outside before.

Supply (economics) William Stanley Jevons Transparency (market) Resource allocation Fixed book price agreement Duopoly Economic collapse Hal Varian Project Gutenberg

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