Demand reflects the desire and ability to purchase a product at a certain price. It is based on the marginal utility of a product (the increase in utility associated with the consumption of each subsequent unit of a product), adjusted for the purchasing power of the consumer.
The demand curve (D) shows how much of a good (Q) consumers can purchase at different price levels. Curve D demonstrates the operation of the law of demand: the higher the price (P) for a product, other things being equal, the lower the quantity demanded (Q), and vice versa.
Properties of curve D:
1) decreasing;
2) the tangent of the angle of inclination is negative;
3) reflects the inverse relationship between P and Q.
Demand is influenced by price and non-price factors. This function can be represented as
where Pa is the price of this product;
Pn – price of substitute goods;
Pm – price for complementary goods;
I – buyer’s income;
M – tastes and preferences of the buyer.
The law of demand is a model of the economy in which price determines the amount of demand, i.e. Only this dependence exists, and everything else is taken as stable.
Consequently, we have an unambiguous connection - a “price-controlled” quantity of demand. Therefore, a change can only be expressed by movement along the points of the demand curve, reflecting the corresponding change in the quantity of demand.
However, demand is influenced not only by price, but also by other non-price factors. In this case, it is no longer the quantity of demand that changes, but the demand “itself.”
The main factors changing demand itself are:
1) changes in consumer preferences (fashion, health, etc.);
2) the number of buyers (an increase in them leads to an increase in demand itself, and a decrease leads to a fall);
3) change in the amount of income of buyers.
Change in quantity demanded and demand function
Demand curves for interchangeable and complementary goods
9. Supply and quantity supplied. Function and factors of supply.
Supply is the number of goods and services that sellers want to sell at a given price. The figure shows the supply curve.
Factors increasing supply:
introduction of new technologies;
increasing labor productivity.
Law of supply: as the price of a good rises, the supply of that good increases, all other things being equal.
Quantity supplied is the quantity of goods and services that are offered for sale at a certain price during a certain time.
For example, we can say that the quantity supplied of product X at price Y is 1000 units per week.
According to the law of supply, there is a direct relationship between price and quantity supplied, i.e. The quantity supplied is greater at high prices and less at low prices.
If demand for a given product increases, it becomes more rare and its price rises. Therefore, its production becomes more profitable. The quantity supplied increases because rising profits will stimulate production growth. Higher prices and profits will attract other firms into the industry.
When demand falls, the price of a product will decrease, and this will mean that at the current market price this product is in excess. Firms will be forced to lower prices to get rid of surpluses. At reduced prices, production will become less profitable, so the firm will reduce production of this product, and its supply will decrease. A fall in price may cause less efficient firms to exit the industry.
The law of supply shows that producers are willing to produce and offer for sale more of their product at a high price than they would be willing to do at a low price.
The supply curve (S) shows how much of a good producers can sell at different price levels (Figure 5.1). The S curve demonstrates the operation of the law of supply: the higher the price (P) for a product, other things being equal, the greater the volume of supply (Q), and vice versa. S curve properties:
1) increasing;
2) the tangent of the angle of inclination is positive;
3) reflects the direct relationship between P and Q.
Supply is influenced by price and non-price factors. This function can be represented as a formula
where, PA is the price of this product;
PX, RU – prices for economic resources;
Nt – technology used;
T – taxes and subsidies.
Changing supply volume and supply function
The degree of sensitivity of supply to changes in the price of a product is called elasticity of supply. The price elasticity coefficient of supply shows how much the quantity supplied of a product (QS) will change when P changes by 1%
The ES coefficient is always positive, because according to the law, the sentences P and QS change in the same direction. Since the production of goods depends on the degree of utilization of production capacity, the size of inventory, the ability to invest and the timing of their implementation, the elasticity of supply (reaction to changes in the market situation) largely depends on the time factor. Based on the ability of an enterprise to respond to the market situation, three time periods are distinguished.
The influence of the time factor on the elasticity of supply
Demand– the purchasing power of buyers for a given product at a given price.
The actions and decisions of buyers in a particular market reflect their desire to purchase a certain amount of goods at a certain price and characterize market demand.
Demand factors– factors influencing the amount of demand. The main factor is price, influencing demand in accordance with the law of demand. There are a number of others non-price demand factors:
1. Income - this is the amount of money that the consumer received as compensation for his labor efforts (the salary of an employee, in the form of compensation for capital provided to others or leased land). As income increases, consumer demand will change. It will increase for goods that the consumer values highly, and decrease for those that are less valuable to the consumer.
2. Consumer tastes and preferences have a huge impact influence on the volume of demand. They are formed under the influence of the environment, customs, and religion. Education. Age, etc. For example, the growing interest in sports has sharply increased the demand for sports shoes.
3. Number of consumers. The greater the number of consumers in the market at a given level of income, the greater the volume of demand for any product at any price.
4. prices of replaced goods.
Interchangeable goods – These are goods that serve similar purposes, so the buyer can choose among a number of interchangeable goods the one that meets his desires. For example, fungible goods include butter and margarine, raincoats and umbrellas, chickens and turkeys, firewood and coal.
5. prices of complementary goods
Complementary goods – these are those that people want to consume together: shirts and ties, pants and suspenders, needles and thread.
Two goods are defined as complements or substitutes depending on how the demand for one changes with a change in the price of the other. A reduction in the price of one of two interchangeable goods reduces the demand for the other, while for complementary goods the opposite phenomenon occurs (a reduction in the price of cars increases the demand for gasoline and car radios.
Demand function- this is the relationship between our desire to have a particular product (demand for the product) and the factors that determine it.
Q d =f(P,I,T,P s ,P c ,N),
Where Q d is the volume of demand;
P – product price;
I – income;
T – tastes and preferences;
P s - price of replaced goods;
P c - price of complemented goods;
N is the number of buyers of this product.
AMOUNT OF DEMAND- quantity of goods or services certain type that a buyer is willing to buy at a given price within a certain period of time. The amount of demand depends on the income of buyers, prices for goods and services, prices for substitute goods and complementary goods, buyer expectations, their tastes and preferences.
It is important to distinguish between quantity demanded and demand. So if prices have decreased, then the quantity demanded will increase, but the demand itself will remain unchanged. But, for example, in the summer the demand for ice cream increases. Due to the heat, purchases of this product are simply increasing.
Ask price- This is the maximum price that a consumer agrees to pay when purchasing a given product. The demand price is not identical to the market price, that is, the price of a specific purchase, which is also called the market equilibrium price. The demand price is determined by the amount of income. It depends on the income and remains fixed, since the buyer cannot pay more.
The higher the demand price, the larger number buyers whose income does not allow them to purchase a given product, therefore, less of the product will be sold.
Individual demand characterizes the desire of individuals to buy a given product at a certain price.
The higher or lower the price, the correspondingly less or more demand.
Today almost anyone developed country The world is characterized by a market economy in which government intervention is minimal or completely absent. Prices for goods, their assortment, production and sales volumes - all this develops spontaneously as a result of the work of market mechanisms, the most important of which are law of supply and demand. Therefore, let’s look at least briefly at the basic concepts economic theory in this area: supply and demand, their elasticity, demand curve and supply curve, as well as their determining factors, market equilibrium.
Demand: concept, function, graph
Very often one hears (sees) that such concepts as demand and quantity of demand are confused, considering them synonyms. This is wrong - demand and its magnitude (volume) are completely different concepts! Let's look at them.
Demand (English "Demand") is the solvent need of buyers for a certain product at a certain price level for it.
Quantity of demand(quantity demanded) - the quantity of goods that buyers are willing and able to purchase at a given price.
So, demand is the need of buyers for a certain product, ensured by their solvency (that is, they have money to satisfy their need). And the quantity of demand is a specific quantity of goods that buyers want and can (they have the money to do so) buy.
Example: Dasha wants apples and she has money to buy them - this is demand. Dasha goes to the store and buys 3 apples, because she wants to buy exactly 3 apples and she has enough money for this purchase - this is the value (volume) of demand.
The following types of demand are distinguished:
- individual demand– an individual specific buyer;
- total (aggregate) demand– all buyers available on the market.
Demand, the relationship between its value and price (as well as other factors) can be expressed mathematically, in the form of a demand function and a demand curve (graphical interpretation).
Demand function– the law of dependence of the quantity of demand on various factors influencing him.
– a graphic expression of the dependence of the quantity of demand for a certain product on its price.
In the simplest case, the demand function represents the dependence of its value on one price factor:
P – price for this product.
The graphical expression of this function (demand curve) is a straight line with a negative slope. This demand curve is described by the usual linear equation:
where: Q D - the amount of demand for this product;
P – price for this product;
a – coefficient specifying the offset of the beginning of the line along the abscissa axis (X);
b – coefficient specifying the angle of inclination of the line (negative number).
A linear demand graph expresses the inverse relationship between the price of a product (P) and the quantity of purchases of that product (Q)
But, in reality, of course, everything is much more complicated and the amount of demand is influenced not only by price, but also by many non-price factors. In this case, the demand function takes the following form:
where: Q D - the amount of demand for this product;
P X – price for this product;
P – price of other related goods (substitutes, complements);
I – income of buyers;
E – buyer expectations regarding future price increases;
N – the number of possible buyers in a given region;
T – tastes and preferences of buyers (habits, following fashion, traditions, etc.);
and other factors.
Graphically, such a demand curve can be represented as an arc, but this is again a simplification - in reality, the demand curve can have any most bizarre shape.
In reality, demand depends on many factors and the dependence of its value on price is nonlinear.
Thus, factors influencing demand:
1. Price factor demand– the price of this product;
2. Non-price factors of demand:
- the presence of interrelated goods (substitutes, complements);
- level of income of buyers (their solvency);
- number of buyers in a given region;
- tastes and preferences of customers;
- customer expectations (regarding price increases, future needs, etc.);
- other factors.
Law of Demand
To understand market mechanisms, it is very important to know the basic laws of the market, which include the law of supply and demand.
Law of Demand– when the price of a product rises, the demand for it decreases, with other factors remaining constant, and vice versa.
Mathematically, the law of demand means that there is an inverse relationship between the quantity demanded and the price.
From a layman’s point of view, the law of demand is completely logical - the lower the price of a product, the more attractive it is to purchase and the greater the number of units of the product will be purchased. But, oddly enough, there are paradoxical situations in which the law of demand fails and acts in the opposite direction. This is reflected in the fact that the quantity demanded increases as the price increases! Examples are the Veblen effect or Giffen goods.
The law of demand has theoretical basis. It is based on the following mechanisms:
1. Income effect- the buyer’s desire to purchase more of a given product when its price decreases, without reducing the volume of consumption of other goods.
2. Substitution effect– the willingness of the buyer, when the price of a given product decreases, to give preference to it, refusing other more expensive goods.
3. Law of Diminishing Marginal Utility– as this product is consumed, each additional unit of it will bring less and less satisfaction (the product “gets boring”). Therefore, the consumer will be willing to continue to buy this product only if its price decreases.
Thus, a change in price (price factor) leads to change in demand. Graphically, this is expressed as movement along the demand curve.
Change in the quantity of demand on the graph: moving along the demand line from D to D1 - an increase in the volume of demand; from D to D2 - decrease in demand volume
The impact of other (non-price) factors leads to a shift in the demand curve – changes in demand. When demand increases, the graph shifts to the right and up; when demand decreases, it shifts to the left and down. Growth is called - expansion of demand, decrease – contraction of demand.
Change in demand on the graph: shift of the demand line from D to D1 - narrowing of demand; from D to D2 - expansion of demand
Elasticity of demand
When the price of a product rises, the quantity demanded for it decreases. When the price decreases, it increases. But this happens in different ways: in some cases, a slight fluctuation in the price level can cause a sharp increase(fall) in demand; in others, a change in price within a very wide range will have virtually no effect on demand. The degree of such dependence, sensitivity of the quantity demanded to changes in price or other factors is called elasticity of demand.
Elasticity of demand– the degree to which the quantity demanded changes when price (or another factor) changes in response to a change in price or other factor.
A numerical indicator reflecting the degree of such change - demand elasticity coefficient.
Respectively, price elasticity of demand shows how much the quantity demanded will change if the price changes by 1%.
Arc price elasticity of demand– used when you need to calculate the approximate elasticity of demand between two points on an arc demand curve. The more convex the demand arc, the higher the error in determining elasticity.
where: E P D - price elasticity of demand;
P 1 – initial price for the product;
Q 1 – the initial value of demand for the product;
P 2 – new price;
Q 2 – new quantity of demand;
ΔP – price increment;
ΔQ – increment in demand;
P avg. – average prices;
Q avg. – average demand.
Point price elasticity of demand– is used when the demand function is specified and there are values of the initial quantity of demand and the price level. Characterizes the relative change in the quantity demanded with an infinitesimal change in price.
where: dQ – differential of demand;
dP – price differential;
P 1, Q 1 – the value of price and quantity of demand at the analyzed point.
Elasticity of demand can be calculated not only by price, but, for example, by the income of buyers, as well as by other factors. There is also cross elasticity of demand. But we will not consider this topic so deeply here; a separate article will be devoted to it.
Depending on the absolute value of the elasticity coefficient, the following types of demand are distinguished ( types of elasticity of demand):
- Perfectly inelastic demand or absolute inelasticity (|E| = 0). When the price changes, the quantity demanded remains virtually unchanged. Close examples include essential goods (bread, salt, medicine). But in reality there are no goods with completely inelastic demand for them;
- Inelastic demand (0 < |E| < 1). Величина спроса меняется в меньшей степени, чем цена. Примеры: товары повседневного спроса; товары, не имеющие аналогов.
- Demand with unit elasticity or unit elasticity (|E| = -1). Changes in price and quantity demanded are completely proportional. The quantity demanded grows (falls) at exactly the same rate as the price.
- Elastic demand (1 < |E| < ∞). Величина спроса изменяется в to a greater extent than the price. Examples: goods that have analogues; luxuries.
- Perfectly elastic demand or absolute elasticity (|E| = ∞). A slight change in price immediately increases (decreases) the quantity demanded by an unlimited amount. In reality, there is no product with absolute elasticity. A more or less close example: liquid financial instruments traded on an exchange (for example, currency pairs on Forex), when a small price fluctuation can cause a sharp increase or decrease in demand.
Sentence: concept, function, graph
Now let's talk about another market phenomenon, without which demand is impossible, its inseparable companion and opposing force - supply. Here we should also distinguish between the offer itself and its size (volume).
Offer (English "Supply") - the ability and willingness of sellers to sell goods at a given price.
Supply quantity(volume supplied) - the quantity of goods that sellers are willing and able to sell at a given price.
The following are distinguished: types of offer:
- individual offer– a specific individual seller;
- general (aggregate) supply– all sellers present on the market.
Suggestion function– the law of dependence of the quantity of supply on various factors influencing it.
– a graphical expression of the dependence of the quantity of supply for a certain product on its price.
In simplified terms, the supply function represents the dependence of its value on price (price factor):
P – price for this product.
The supply curve in this case is a straight line with a positive slope. The following linear equation describes this supply curve:
where: Q S - the amount of supply for this product;
P – price for this product;
c – coefficient specifying the offset of the beginning of the line along the abscissa axis (X);
d – coefficient specifying the angle of inclination of the line.
A linear supply graph expresses a direct relationship between the price of a good (P) and the quantity of purchases of that good (Q)
The supply function, in its more complex form that takes into account the influence of non-price factors, is presented below:
where Q S is the quantity of supply;
P X – price of this product;
P 1 ...P n – prices of other interrelated goods (substitutes, complements);
R – availability and nature of production resources;
K – technologies used;
C – taxes and subsidies;
X – natural and climatic conditions;
and other factors.
In this case, the supply curve will have the shape of an arc (although this is again a simplification).
In real conditions, supply depends on many factors and the dependence of supply volume on price is nonlinear.
Thus, factors influencing supply:
1. Price factor– the price of this product;
2. Non-price factors:
- availability of complementary and substitute products;
- level of technology development;
- quantity and availability of necessary resources;
- natural conditions;
- expectations of sellers (manufacturers): social, political, inflation;
- taxes and subsidies;
- type of market and its capacity;
- other factors.
Law of supply
Law of supply– when the price of a product rises, the supply for it increases, with other factors remaining constant, and vice versa.
Mathematically, the law of supply means that there is a direct relationship between the quantity supplied and the price.
The law of supply, like the law of demand, is very logical. Naturally, any seller (manufacturer) strives to sell their goods at a higher price. If the price level on the market increases, it is profitable for sellers to sell more; if it decreases, it is not.
A change in the price of a product leads to change in supply. This is shown on the graph by movement along the supply curve.
Change in supply quantity on the graph: movement along the supply line from S to S1 - increase in supply volume; from S to S2 - decrease in supply volume
Changes in non-price factors lead to a shift in the supply curve ( changing the proposal itself). Expansion of offer– shift of the supply curve to the right and down. Narrowing the offer– shift left and up.
Change in supply on the graph: shift of the supply line from S to S1 - narrowing of supply; from S to S2 - sentence extension
Elasticity of supply
Supply, like demand, may vary to varying degrees depending on changes in price and other factors. In this case, we talk about the elasticity of supply.
Elasticity of supply- the degree of change in the quantity of supply (the quantity of goods offered) in response to a change in price or other factor.
A numerical indicator reflecting the degree of such change - supply elasticity coefficient.
Respectively, price elasticity of supply shows how much the quantity supplied will change if the price changes by 1%.
The formulas for calculating the arc and point price elasticity of supply (Eps) are completely similar to the formulas for demand.
Types of elasticity of supply by price:
- perfectly inelastic supply(|E|=0). A change in price does not affect the quantity supplied at all. This is possible in the short term;
- inelastic supply (0 < |E| < 1). Величина предложения изменяется в меньшей степени, чем цена. Присуще краткосрочному периоду;
- unit elastic supply(|E| = 1);
- elastic supply (1 < |E| < ∞). Величина предложения изменяется в большей степени, чем соответствующее изменение цены. Характерно для long term;
- absolutely elastic supply(|E| = ∞). The quantity supplied varies indefinitely with an insignificantly small change in price. Also typical for the long term.
What is noteworthy is that situations with completely elastic and completely inelastic supply are quite real (unlike similar types of elasticity of demand) and occur in practice.
Supply and demand “meeting” in the market interact with each other. When free market relations Without strict government regulation, they will sooner or later balance each other (a French economist of the 18th century spoke about this). This state is called market equilibrium.
– a market situation in which demand is equal to supply.
Graphically, market equilibrium is expressed market equilibrium point– the point of intersection of the demand curve and the supply curve.
If supply and demand do not change, the market equilibrium point tends to remain unchanged.
The price corresponding to the market equilibrium point is called equilibrium price, quantity of goods - equilibrium volume.
Market equilibrium is graphically expressed by the intersection of the demand (D) and supply (S) schedules at one point. This point of market equilibrium corresponds to: P E - equilibrium price, and Q E - equilibrium volume.
Eat different theories and approaches explaining exactly how market equilibrium is established. The most famous are the approach of L. Walras and A. Marshall. But this, as well as the cobweb-like model of equilibrium, a seller’s market and a buyer’s market, is a topic for a separate article.
If very short and simplified, then the market equilibrium mechanism can be explained as follows. At the equilibrium point, everyone (both buyers and sellers) is happy. If one of the parties gains an advantage (the market deviates from the equilibrium point in one direction or another), the other party will be unhappy and the first party will have to make concessions.
For example: price above equilibrium. It is profitable for sellers to sell goods at a higher price and supply increases, creating an excess of goods. And buyers will be unhappy with the increase in the price of the product. In addition, competition is high, supply is excessive and sellers, in order to sell the product, will have to reduce the price until it reaches an equilibrium value. At the same time, the volume of supply will also decrease to the equilibrium volume.
Or other example: the volume of goods offered on the market is less than the equilibrium volume. That is, there is a shortage of goods on the market. In such conditions, buyers are willing to pay a higher price for a product than the price at which it is sold in this moment. This will encourage sellers to increase supply while simultaneously raising prices. As a result, the price and volume of supply/demand will reach an equilibrium value.
In essence, this was an illustration of the theories of market equilibrium of Walras and Marshall, but as already mentioned, we will consider them in more detail in another article.
Galyautdinov R.R.
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It is possible to sell all goods on the market and satisfy needs only when, at a certain price, demand = supply. This condition is called market equilibrium . In this case it is set equilibrium price , and the market stabilizes. Equilibrium in markets is a situation in which sellers and buyers are satisfied with the current combination of prices and the volume of sales or purchases.
But since the interests of the buyer and the seller are in different directions, this state is short-lived in life.
The volume of demand is equal to the volume of supply (Q d = Q s) and both mean the equilibrium volume: the demand price is equal to the supply price (P d = P s) and both form the equilibrium price P E. There is no tendency in the market to change the market price or the quantity of goods sold , the price is such that the quantity of goods that buyers want to purchase exactly matches the quantity of goods that sellers want to offer. Thus, both supply and demand simultaneously participate in the formation of the equilibrium price.
Equilibrium is called stable if deviation from it is accompanied by a return to the original state. Otherwise, there is an unstable equilibrium.
If the supply exceeds the demand, then producers' inventories increase, signaling excess supply. This will force producers to reduce prices so that supply and demand are equal. A fall in demand for a product at the existing price leads to the appearance of a surplus, the surplus puts pressure on the price, when the price decreases, supply is reduced, and at a new price the plans of sellers and buyers coincide again. If demand exceeds supply and it is not satisfied, excess demand or shortage is formed. The main signs of deficiency is a reduction in inventory and the appearance of queues in industries that do not have inventory (service industry). Inventory– funds of goods already produced and ready for sale. Sellers keep some goods in stock to quickly respond to changes in demand.
Equilibrium price (E) – a price that balances supply and demand as a result of competition, a price at which there is neither a surplus nor a shortage of a given product in the market, a price of a product at which producers' decisions to sell and consumers' decisions to buy are mutually consistent. The formation of an equilibrium price is a process that requires a certain amount of time.
The mechanism for establishing equilibrium. If the price in the market is set at a low level, then demand will be high and supply will be low, therefore price and supply will increase. If the price in the market is set at a high level, demand will be low, therefore the price will fall. As a result of such price fluctuations, an optimal price is established in the market that suits both sellers and buyers.
Equilibrium price functions: informational; distribution; balancing; stimulating.
18. Public goods and their features.
Such benefits are divided into private and public. Private goods - each unit of which can be sold at a market price, and being consumed by one person cannot be consumed by another. Consumers compete to acquire such goods—these are pure private goods. Public goods – providing them to one person is impossible without providing them to others, and without additional costs.
They are divided into :
1) Clean public – consumed by people collectively, whether they pay for it or not, it is non-competitive in consumption.
2) Excluded – not very competitive, those for which you can set a price and limit access.
3) Overloadable – can be consumed by everyone if they are available in sufficient quantities (roads).
4) Limited – are neither purely public nor purely private. The optimal volume of production of a pure public good is achieved when the marginal social benefit from consuming the volume of the good is equal to the marginal cost of its production MSB=MC. If the market cannot ensure the supply of public goods in relation to demand, then the state does it.
Public (collective) goods produced for shared consumption and are not owned by anyone. A person consumes these benefits simultaneously with other subjects of the economy, and the consumption of these benefits by one person does not reduce the availability of these benefits to others and no one can be prohibited from using this benefit. These are national defense, public administration, protection of public order, organization of public transport, functioning of the healthcare system, education, etc.
First of all, in the consumption of public goods there is no rivalry. The consumption of such a good by any one consumer does not reduce the quantity available for consumption by others. For example, listening to a radio broadcast by one radio listener does not deprive others of the same opportunity and does not reduce its quality. The second feature of public goods, called non-excludability, consists in the impossibility of preventing their consumption. It is impossible (or, in any case, very expensive) to prevent one listener from receiving radio broadcasts when his neighbor can receive them.
Public goods are paid for through general taxation rather than purchased by individual consumers in the market. The national defense system is an example of a public good because it affects everyone equally.
Pure public goods have two main features.
1) Pure public goods have property of indiscriminate consumption , meaning that for a given volume of a good, its consumption by one person does not reduce its availability to others.
2) Consumption of pure public goods do not have exclusive consumption , i.e. it is not an exclusive right. This means that consumers who are unwilling to pay for such goods cannot be deprived of the opportunity to consume them. A pure public good cannot be produced in “small quantities” that could be sold through a cash register.
Note that in addition to public goods, there are also public "anti-goods" - public goods that impose costs evenly on a group of people. These are undesirable by-products of production or consumption: the greenhouse effect, in which the combustion of minerals threatens global climate change; air, water and soil pollution from chemical waste, energy production or the use of cars; acid rain; radioactive releases from nuclear weapons testing; thinning of the ozone layer.
A number of benefits are not neither purely public nor purely private . For example, the police services, on the one hand, represent a public good, but on the other hand, by solving burglaries, they provide a private service to a specific person.
All market transactions are interconnected. If a certain product is sold to anyone at a certain price, then a similar product cannot, under the same conditions, cost more or less. One transaction affects another; demand (or supply) that appears in one place affects the general state of the market. In other words, competitive pricing accumulates in the price a huge amount of diverse information about the quantitative and qualitative characteristics of economic processes and forms the information and incentive basis of a market economy.
Supply and demand, in a certain sense, are a market replacement (or market equivalent) of the regulatory mechanism that was characteristic of a planned economy, when it was assumed that the entire variety of economic information was known to the central planning authority. And if planners only tried, on the basis of their own “comprehensive” awareness, to develop the most rational ways to achieve socio-economic goals and determine the directions of action of all persons participating in economic processes, then the mechanism of supply and demand actually realizes all these goals in market economy.
Buyers' demand for certain goods is formed under the influence of needs, i.e. a person's desire to provide for himself better conditions life. Needs are highly individual; They are different for each person and are formed under the influence of a number of factors that determine the conditions of existence:
Himself (for example, the need or lack of need for warm clothing is determined by the climate of the country, the degree of hardening of a person, his tastes);
His family and close circle (thus, the need for education of children and the strength of its manifestation depend on the level of development of society and on the place that a given individual occupies in society);
The social, national, religious and other community to which a person belongs (say, the need for national defense depends on international situation state of which the person is a citizen).
At the same time, from the huge range of human needs, economic science is primarily interested in those that are supported by appropriate monetary capabilities, in other words, it is interested in “effective demand.” Thus, demand is the desire and ability of buyers to make transactions to purchase a product available on the market. And the quantity demanded is the quantity of a good that buyers are willing and able to purchase at a given price within a certain time.
It is well known that goods can usually be sold at a low price faster and in larger quantities than at a higher price. At the same time, increased, rush demand leads to inflated prices, and sluggish and decreased demand leads to their reduction. This inverse relationship between the market price of a product and the quantity that can be bought or sold at this price is called the law of demand.
According to the law of demand, consumers, all other things being equal, will buy a larger quantity of goods, the lower their market price. Another formulation of this law is possible: the law of demand consists of an inverse relationship between the price level and the quantity of products purchased.
The law of demand is one of the fundamental laws of a market economy. The deep reasons for its existence are rooted in the very nature of value and prices. These will be discussed later as part of the analysis of theories of value. For now, we will limit ourselves to listing the immediate prerequisites for its occurrence:
1) a decrease in price leads to an increase in the number of buyers to whom this product becomes available;
2) the same consumer can afford to buy larger quantities of cheaper goods. In the economic literature, this phenomenon is usually called the income effect, since a decrease in prices is equivalent to an increase in consumer income;
3) a cheaper product “pulls away” part of the demand, which otherwise would be directed to the purchase of other goods. This phenomenon also has a special name - the substitution effect.
The law of demand establishes an inverse relationship between price and the volume of products that consumers want to buy. Thus, this law proclaims price to be the main factor determining the size of demand. But economic practice convinces us of the opposite: in a market economy, demand is to a large extent determined by price. It is no coincidence that, if extreme situations are not taken into account, it is the price that is primarily of interest to the consumer who decides to buy a product. And all other characteristics are necessarily considered through the prism of prices (remember how we talk, for example, about such an important characteristic as quality: an expensive car, but it’s worth the money).
The relationship between the price of a product and the demand for it can be presented in tabular, graphical and functional ways. Let's say we know how many kilograms of sausage can be sold in a nearby supermarket in a week at different price levels. Then the relationship between price and demand can be presented in the form of a table.
The same dependence can be presented in the form of a graph in the coordinates of sausage prices (P - independent variable) and the quantity of sausage purchased (Q - dependent variable) (Fig. 4.1). To construct a graph, we use the data from our hypothetical example (Table 4.1)
Table 4.1
Line D is called the demand curve. It shows how much quantity (Q) of a product buyers are willing to buy:
A) at each given price level;
B) in a specific period of time;
C) with other factors remaining constant.
In other words, movement along the demand curve (from one point to another) reflects the change in the quantity of a good that consumers demand as a result of a change in the price of the good.
The functional relationship between the volume of demand (QD) and price can also be presented in analytical form, i.e. in the form of a formula
Rice. 4.1. Dependence of demand on price
However, in such general form it does not reflect the inverse relationship between demand and price, and when practical application the formula needs to be specified. For example, if the dependence is linear, it will take the form
QD – bP = a,
Where a, b are numerical coefficients.
In our conditional example it will look like this:
QD -5Р?= 300.
In economic theory, it is customary to distinguish between individual demand, as the demand of an individual buyer for a certain product, and market demand, i.e., the total demand of all buyers for each price of the product. If we denote by qij the individual demand for i-th product jth buyer, then market demand can be expressed as
Where Qi is market demand, n is the number of buyers in the market.
The individual demand curve, like the market demand curve, has a negative slope, i.e., reflecting the already described inverse relationship between demand and price, is not smooth, but rather has a stepped appearance.
To induce a person, say, to buy two sticks of butter instead of one, a small reduction in price compared to the usual level is not enough. That is, if instead of 10 rubles. (Moscow price at the beginning of 1999) it will cost 9 rubles. 80 kopecks, then 9 rubles. 60 kopecks, then 9 rubles. 40 kopecks, then all these changes most likely will not force one specific buyer to double the purchase volume. But at some point (let’s say, at a price of 8 rubles) he will react by increasing the quantity of product purchased. A jump in demand, a “step,” will appear on the graph. Since the “sensitivity threshold” is different for consumers, when summed up, the stepwise individual demand curves will smooth each other out and ultimately create a smooth market demand curve.
The price factor is the most important, but not the only one, influencing demand. Among other non-price factors that determine the volume of demand, it should be noted:
Consumer income (I), which determines the size of the consumer budget;
Prices for other goods (Pa ... Pn), some of which are closely related to each other, for example, interchangeable (substitute goods) and complementary goods;
Customer tastes (T), which are influenced by many factors - from changing fashion before national traditions;
Total number of buyers or market size (N);
Customer expectations, including inflation (W);
Other factors (B).
Taking into account all these factors, the overall demand function can be represented as follows:
QD = f (P, I, Pa...Pn, T, N, W, B).
It is impossible to display such a multitude of variables on a conventional two-dimensional graph. However, their influence can be taken into account in a different way. If a change in price in the graphical interpretation of demand meant a movement along the demand curve, then a change in non-price factors of demand leads to a shift in the demand curve to the right or left.
Let’s say that as a result of a decrease in income, there is a decrease in the consumer budget and the resulting demand. In our example, because of this, the demand curve for rice. 4.2 will shift from position D to position D2 and, at the same price, they will buy fewer sausages (Q2 instead of Q).
Respectively opposite event- income growth - will lead to an increase in demand (see Fig. 4.2), this is a shift of the curve from D to D1).
Rice. 4.2. Shifts in the demand curve
The action of non-price factors of demand (determinants of demand) can often neutralize the influence of price, that is, a change in the quantity of goods purchased can occur externally regardless of price movements. For example, if an increase in prices and an increase in income occur simultaneously, then a trajectory may well appear on the graph, designated by us as points A, B and C. At first glance at it, one may get the impression that the law of demand has been violated: after all, despite the rise in prices (from RA to RS) the physical volume of demand increases (from QA to QC). In fact Negative influence rising prices here are simply masked by rising incomes. An increase in prices would reduce the amount demanded, but due to an increase in income, the demand curve successively moved from position D2 to position D, and then to D1, which caused an increase in demand. It is easy to see that without this shift and the demand curve D2 continuing to operate, even a rise in prices from PA to PB would inevitably cause a sharp decrease in demand.
It is necessary to distinguish between a change in the quantity demanded and a change in the demand function. In the first case, the quantity demanded changes as the price changes. On the graph, this is expressed as sliding along the demand curve due to changes in price (Fig. 4.3).
In the second case, the demand function shifts to the right or left (Fig. 4.4). In this case, more (less) products are purchased at the same price.
Rice. 4.3. Change in quantity demanded
To identify the influence of a particular factor on the size of demand, one should abstract from the influence of all other factors, i.e., use the principle “all other things being equal.” To do this, it is necessary that all parameters, except the one being analyzed, remain unchanged.
Let's look at some of the listed non-price demand factors.
The income of the population and the amount of accumulated property are usually directly related to demand, that is, the richer the population, the greater the demand; and the poorer it is, the less.
Thus, the situation with the demand for most consumer goods on the Russian market after the devaluation of the ruble in August 1998. and the subsequent fall in the level of real income of the population corresponds precisely to this case. As a result of the crisis, there was a decrease in consumer spending or a decrease in demand for goods. On the graph (see Fig. 4.2) this looks like a shift in the demand curve from position D to position D2.
Let us repeat, however, that this is the case in most, but not all, cases. In economic theory, it is customary to distinguish between normal and abnormal goods. The above does not apply to the latter (usually these are products perceived as a worse alternative in comparison with others): as incomes rise, demand for them falls. What about when income falls? growing.
Let's take an example of substitute products? margarine and butter. Cheap margarine is perceived as the poor man's butter. Therefore, as household incomes increase, we should expect a fall in demand for it and consumers switching to butter. But this is only true to the extent that a given product is perceived by the population as a worse choice.
The demand for expensive varieties of margarine, which has known advantages over butter (for example, lower cholesterol content), will respond to an increase in income in the normal way, that is, it will not fall, but grow.
In Fig. 4.4 introduced real example reactions of demand for normal and abnormal goods in the context of falling household incomes during the initial period of reforms in Russia. With a decrease in income, people began to consume more bread (by 10%) and potatoes (by 19%), i.e., they increased the demand for abnormal goods.
At the same time, they reduced the consumption of meat (by 19%) and fruit (by 16%), reducing the demand for normal goods. Yes, this is understandable: trying to save on food, people are forced to increase their consumption of cheap (and lower quality) products.
Rice. 4.4. Demand for goods in the initial period of reforms in Russia (1990 - 100%): a) abnormal goods;
B) normal goods
By the way, 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 than more share meat, milk, fruit, the richer it is.
The demand for a given good and the prices for other goods change differently. Thus, a decrease in the price of substitute goods that can replace a given product in consumption (for example, tea - coffee, beef - chicken legs, coal - oil) will lead to a decrease in demand for this product (see in Fig. 4.2 this is a shift of the curve to the left down to D2), i.e., preference will be given to cheaper competing goods.
More specifically, if we analyze the demand for coal in connection with the miners' strikes in Russia, and we know that the price of oil, a substitute for coal, is declining, then, sadly, we should expect a further decrease in the demand for coal. This means that the state must promptly begin preparations for mitigation new wave social difficulties in mining regions. But with rising oil prices, the situation in the mining regions will ease, as the demand for coal will increase.
A change in prices for complementary goods that complement a given good in consumption (examples include photographic film and cameras, gasoline and cars, sugar and berries) leads to a unidirectional change in demand, i.e., when the price of any of the complementary goods increases, demand falls by both; when prices fall, it increases simultaneously.
Thus, an increase in sugar prices during jam-making seasons leads to a decrease in demand for berries. It is no coincidence that in such cases in Russian women's magazines the number of recipes for making sugar-free jam sharply increases. As they say, the need for invention is tricky: not being able to cancel the economic pattern, zealous housewives try to get around it by completely abandoning the complementary product.
The influence of consumer expectations on demand is also very diverse. The increase in demand may be due to inflationary reasons - confidence in the mandatory rise in prices of goods. This kind of rush demand can be periodically observed on the Russian market in last years. In August 1998 crowds of frightened buyers literally swept any goods off the shelves. People quite reasonably believed that after the devaluation they would rise sharply in price. For some time, even the ghosts of the past were resurrected: long queues, the disappearance of some goods from sale, etc.
Seasonal, pre-holiday fluctuations in sales can also be attributed to changes in demand under the influence of consumer expectations.
The volume of demand and such factors as consumer tastes and preferences change quite dynamically. As soon as miniskirts come into fashion, the demand curve for fabric shifts down: what else, and there is practically no need for fabric for these outfits. On consumer preferences and their changes, in turn, influence family and social status consumers, age, gender, sustainability of national traditions, etc.
But it’s not just fashion that changes preferences. A much larger reason for their changes is technological progress. Before the eyes of the current generation of Russian youth, the demand for records was practically “killed” by the spread of compact discs.