Demand, supply, and price are the main elements of the market. The whole complex of their multidimensional connections and interactions forms a market mechanism. This is a mechanism for connecting sellers and buyers through the formation of a demand for a good and a supply of a good.
Demand in a Market Economy
The study of the main characteristics of the market begins with demand. This is due to the fact that demand (compared to supply) is a more mobile parameter of the market, as a result of which the market mechanism moves much more often under the influence of changes in demand itself. Let’s agree in advance that supply and demand will depend only on the influence and dynamics of the price; all other factors will be variable only when it is specifically noted.
However, all economic benefits have to be paid for, and buyers’ money is a limited resource. Therefore, the economy is always oriented not on human needs as such, but only on that part of them that can be supported by payment. This part of needs is usually called the amount of purchase demand; it characterizes the number of goods that buyers can actually purchase under certain conditions.
Demand is an economic category that reflects the desire and ability of consumers to buy any quantity of goods at a certain price at a certain time. At the same time, if the magnitude of demand is considered within the framework of macroeconomics, then we are talking about aggregate demand in the entire economic system of the state.
The basis of demand is the marginal utility of a good (the increase in the utility of a good with the consumption of each subsequent unit of it up to the saturation level), adjusted for the purchasing power of the consumer; in other words, income. Demand is influenced by two types of factors:
- the price of the goods;
- non-price factors: consumer preferences, inflationary expectations, the purchasing power of consumers, prices for substitute goods and other goods, and services.
Which Are the Main Factors Affecting Demand?
Demand and supply are integral categories of the market organization of the economy, which express the objective economic relations of commodity production, three the development of the social organization of commodity production and changes in the economic system change the specific methods of micro- and macroeconomic regulation of demand and supply. The overall economic content of these categories of the market economy remains unchanged.
Factors affecting demand:
- usefulness and necessity of the goods;
- number of buyers;
- expectations of price changes;
- income level of the population;
- availability of goods on the market.
The price level is the determining factor affecting solvent demand. It has been proven that the basic property of demand is precisely that, all factors remaining unchanged, a decrease in the price of a good (service) leads to a corresponding increase in the amount of demand, and, conversely, an increase in price leads to a decrease in demand.
The existence of such a negative feedback relationship between the price level and the amount of demand, which reflects significant and constant dependencies, that is, has all the features of a regular relationship, indicates that we are dealing with the law of demand. The demand for a product changes depending on the change in the number of people willing and able to buy a certain product.