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Theory of Demand and Supply

Demand and Supply in Different Markets


Demand Criteria

Since the analysis of a business firm is central to managerial economics, we are primarily interested in the demand for a commodity faced by a firm.

The demand for a commodity faced by a firm depends on the size of the market, industry demand for the commodity, the form in which the market is organized and the number of firms in the industry vying for the same set of resources and customers.

 

Product demand and supply

 

Demand Curve

The market demand curve for a commodity shows the various quantities of the commodity demanded in the market per time period at various alternative prices of the commodity, while holding everything else constant.

The curve is negatively sloped, indicating that price and quantity are inversely related. The things held constant in drawing a market demand curve for a product are the number of customers in the market, consumer’s income, the prices of related commodities and tastes.

 

Theory of demand and supply

Types of Markets

Monopoly and Perfect Competition

Coming back to the form of a business firm, at one end there exist the monopolist (the sole producer of a commodity for which there are no good substitutes), and at the other end, perfect competition, where there are a large number of firms producing a homogenous product and each firm is too small to affect the price of the commodity by its own actions.

In such a case, each firm is a price taker unlike the monopolist who is a price maker thanks to the product exclusivity factor.

 

Oligopoly

In oligopoly there are only a few firms in the industry producing either a homogenous or differentiated product. Since there are only a few firms, the pricing, advertising and other promotional behavior of each firm greatly affect the other firms in the industry and evoke imitation or duplication. We witness many industrial giants fighting for their market share in the respective industrial domains.

 

Monopolistic

In monopolistic competition, there are many firms selling a differentiated product. As the name implies, monopolistic competition has elements of both competition and monopoly.

The monopoly element arises because each firm’s product is somewhat different from other firm’s products that facilitate the firms to have some degree of control over the price.

monopoly vs oligopoly

Although we try to establish an inverse relationship between price and demand, the other side of the coin shows a different picture in that, as the income levels of a consumer is on an increasing trend, his or her purchasing power increases.

Consumers tend to purchase more of most commodities like automobiles, housing, travel and so on, when the income rises. There are some goods, however of which the consumer purchases decline as income rises- for example, maize and similar cheap foods as the consumer has the power to buy goods with better quality and there is no need for a compromise.

Demand is one of the most important aspects of managerial economics, since a firm would not be established or survive if a sufficient demand for its product did not exist or could not be created.

A firm could have the most efficient production techniques and the most effective management, but still without a demand for its product that is sufficient to cover all production and selling costs over the long run, it simply could not survive. Demand is thus essential for the creation, survival and profitability of a firm.

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