DEMAND AND SUPPLY

The function of the market is to provide transactions between buyers and sellers, or between the demandside and thesupply side. The supply side is made up of firms and the demand side of households or of other firms. In the labour market, it is households which make up the supply side – offeringtheir labour for sale – while production units make up thedemand side.

The amount of the goods households will want to buy depends on a broad range of factors. However, one factor, which is likely to influence demand strongly, is the product price. Demand is a consumer’s willingness and ability to buy a product or service. The law of demand Nationals that all else being equal, more items will be sold at a lower price than at a higher price.

Supply varies directly with price. At a higher price more goods and services will be offered for sale than at a lower one, and vice versa.

The laws of supply and demand work most effectively in markets with large numbers of sellers and buyers, who are selling or buying a relatively homogeneous product. In markets that do not possess these features, the forces of supply and demand are determined by the structures prevailing in these markets.

How much the quantity demanded changes in response to price changes is called the price elasticity of demand. The good or service has an elastic demand if the quantity demanded changes considerably, if it is very responsive to changes in price. If the quantity demanded changes little, the good or service has an inelastic demand. Inelastic demand means the quantity demanded responds relatively little to changes in price. Several factors determine if a product has an elastic or inelastic demand schedule. Necessities tend to have an inelastic demand; people find it hard to give up a necessity. Luxuries tend to have an elastic demand, because people can get along without them if the price is too high. The price that equalizes the amount producers want to sell and consumers want to buy is called the market clearing price, or the equilibrium price.

Ø Comprehension:

1. What is the main function of the market?

2. What is the supply side and the demand side?

3. When does supply vary?

4. What is called price elasticity of demand?

5. What goods tend to have elastic demand?

6. What is the market clearing price?

Ø Summarizing.

Complete the following sentences to summarize the text above:

1. The market provides … .

2. Households make up the … side of the market.

3. One of the factors that influence demand is … .

4. The laws of supply and demand work most effectively … .

5. The quantity demanded changes in response to … .

6. The market is in equilibrium when … .

Ø Viewpoint:

Give an example when prices for goods were inelastic.