Assignment 4

Business Economics -- Neil Harris

Chapter 5: Market forces (Summary)

Consumer sovereignty

Consumer sovereignty means that all economic activities are focused on meeting the needs of the
consumer. It refers to the fact that the economic system knows what to produce by whether it
makes a profit or not, and that profit is generated by the demand from consumers. Several
economies use the principle of producer sovereignty and apply central-planning instead of
relying on the markets. Many instances throughout the world has proven that this system of
economy fails to keep the welfare of people.

Market demand

The demand for a product may be defined as the amount of it which consumers buy at a given
price and at a given moment in time, other things being equal. These other things or factors
include consumer income (or household income), price of other products (whether it is
complementary or substitution), taste and fashions, and expectation (for example about future
prices). The relationship between the price of a product and the quantity of it demanded is
recorded in a demand schedule.

Market supply

The supply of a product may be defined as the amount of it which producers are willing to put
onto the market at alternative prices, other things remaining equal. These other factors include
the price of inputs, the price of other goods, new technology (more cost-effective technology for
production), and government taxation and subsidies. The relationship between the price of a
product and the quantity of it supplied is recorded in a supply schedule.

Determining market prices

Using supply and demand schedules, we can determine the market prices by finding the
equilibrium where the quantity supplied equals the quantity demanded. At this point the market
is in equilibrium, i.e. the situation is stable with no tendency for the market to move in the short
term, other things remaining equal. In the longer term, variables such as technology, the price of
other goods, household incomes, etc. will change and hence move a market from its equilibrium
position. In the real world, therefore, markets are constantly being knocked from their
equilibrium positions and seeking to return to this situation.

But, in the real world, a market may not produce one price for a good or service. There are
several reasons for that. Firstly, if prices change over a short period, it may simply be that the
market is moving from a non-equilibrium to an equilibrium position. Secondly, different firms
will have different levels of costs in producing a product. There is also the issue that for a market
to achieve one price there must be perfect or complete knowledge. In reality, this does not
happen because information is less than perfect.

The rise of the grey market

Goods brought into a country without manufacturers’ permission and through non-approved
channels of distribution, to sell at lower prices, are known as ‘parallel’ imports or ‘grey’ imports.
If parallel imports are to be permitted much more widely this will certainly improve consumer
choice and hence economic welfare. However, parallel imports will not guarantee price
equalisation between the market the goods come from and the market in which they are sold. The
other area which will help lower prices is the growing sale of goods via the Internet.