Supply and Demand

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The Law of Supply and Demand is the basic principle on which a market economy is based. This principle reflects the relationship between the demand for a product and the quantity offered of that product taking into account the price at which the product is sold.

The law of supply and demand reflects the relationship between the demand for a good in the market and the quantity of the same that is offered based on the price that is established.

Thus, according to the price in the market of a good, the bidders are willing to manufacture a certain number of that good. Just as plaintiffs are willing to buy a certain number of that good, depending on the price. The point where there is an equilibrium because the plaintiffs are willing to buy the same units that the bidders want to manufacture, for the same price, is called market equilibrium or breakeven point.

It has to be considered that the market is free competition, there are negotiations between the bidders and the plaintiffs and the free traffic of goods is allowed.

The theory says that, speaking within a perfect competition market, the price of a good will be placed in a “balance point” where demand equals supply.

According to this theory, the law of demand states that, while everything else remains constant, the quantity demanded of a good diminishes when the price of that good increases. On the other hand, the law of supply indicates that, while everything else remains constant, the quantity offered of a good increases when it does its price.

Thus, the supply curve and the demand curve show how the quantity offered or demanded varies, respectively, as the price of that good varies.

To understand how you can reach the break-even point you have to talk about two situations: scarcity and excess:

When there is an oversupply, the price at which the products are being offered is greater than the equilibrium price. Therefore, the amount offered is greater than the quantity demanded. As a result, bidders will lower prices to increase sales.

On the other hand, when there is a shortage of products, it means that the price of the offered good is less than the equilibrium price. The quantity demanded is greater than the quantity offered. So, the bidders will increase the price, since there are many buyers for few units of the good so that the number of plaintiffs decreases, and the point of equilibrium is established.

Types of competition

Perfect competition: it is an almost ideal economic situation and unlikely in reality. It is a market in which the market price arises from the interaction between companies or people who demand a product and others who produce and offer it. None of the agents can influence the price of the good or service, that is, they are price-acceptors.

Imperfect competition: Individual sellers have the ability to significantly affect the market price of their products or services. We can distinguish according to the degree of imperfect competition:

Monopolistic competition: There is a high number of sellers in the market, although they have a certain power to influence the price of their product.

Oligopoly: the given market is controlled by a small group of companies.

Monopoly: A single company dominates the entire market for a type of product or service, which is often translated into high prices and a low quality monopolized product or service.

Oligopsonio: is a type of market in which there are few plaintiffs, although there can be a lot of bidders. Therefore, the control and the power over prices and the conditions of purchase in the market, resides in the plaintiffs or buyers.

Monopsony: is a market structure where there is a single plaintiff or buyer. While there may be one or more bidders.

The demand is elastic when faced with a variation of the price, the variation in quantity demanded is (in percentage) greater than that of the price. For example, in luxury goods usually happens that before a price increase the amount demanded falls much more percentage.

The demand is inelastic, when faced with price variations the quantity demanded varies (in percentage) less than the price. For example, in some staple foods, even though there is a significant price increase, the quantity demanded does not vary that much.

Through the law of supply and demand producers and consumers can know at what price they are willing to buy a good or service. The difference between the market price and what they are willing to pay or charge is known as consumer surplus and producer surplus, respectively.

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