MARKETS

Firstly, a market can be defined as generally a place where buyers and sellers meet for the
sole purpose of buying and selling a particular good and service, at a particular price and at
a given period of time.

*** always remember that the aims of both buyers and sellers are different, and in both
cases both parties and behavior are guided by the 1st principles of either Demand and
Supply as applicable to which party or group in question.

Let us now differentiate between the market demand and market supply curves:

(1) The market demand curve shows the possible quantities of a good or service that
all consumers are willing and able to buy at different prices:
DIAGRAM 1: AN EXAMPLE OF THE MARKET DEMAND CURVE:
(2) The market supply curve shows the quantities of a good or service that ALL firms in
the market wish to supply at the different prices at a given point in time:

DIAGRAM 2: AN EXAMPLE OF A SUPPLY CURVE:

Let us now deal with the concept of market equilibrium:

Market equilibrium can be defined as and achieved when an agreement occurs

between consumers and suppliers on both the price and quantity of the good or
service in question to be traded between each other:

DIAGRAM 3: THE ACHIEVEMENT OF MARKET EQUILIBRIUM:

** note that the word equilibrium means being equal or in agreement.

MARKET DISEQUILIBRIUM:

Market disequilibrium is said to exist when the price in the market causes the
quantity demanded by consumers to be unequal to the quantity supplied by
producers so therefore this occurs whenever the price in the market is not equal to
the equilibrium price. There are 2 main reasons for this:

(a) Surpluses or Excess Supply: this occurs when the price in the market is such that
quantity supplied by the producers exceeds the quantity demanded by
consumers, which would lead to rising levels of unsold goods and services
supplied by the producers:

DIAGRAM 3: SURPLUS OR EXCESS SUPPLY:

 *** usually this occurs when the price is above the market or equilibrium price

(b) Shortages or Excess Demand: this occurs when the price in the market is such
that the quantity demanded by consumers is greater than the quantity supplied
by producers:

DIAGRAM 4: SHORTAGES OR EXCESS DEMAND:

 ** shortages or excess demand typically occurs when the price is lower than
market or equilibrium price.

** CHANGES IN EITHER DEMAND OR SUPPLY CAN ALSO CAUSE VARIATIONS IN

THE MARKET PRICE AS PER THE CONDITIONS OF EITHER DEMAND OR SUPPLY AS
LISTED AND EXPLAINED IN THE HANDOUTS BEFORE EMILY AND LANA!!

Note that there are 4 possibilities of these changes as listed below:

(a) Increase in demand with supply remaining unchanged

(b) Decrease in demand with supply remaining unchanged
(c) Increase in supply with demand remaining unchanged
(d) Decrease in supply with demand remaining unchanged

DIAGRAM 5: INCREASE IN DEMAND WITH SUPPLY REMAINING UNCHANGED:

In this event both the price and quantity will increase, price increases from P to P’, while
quantity increases from Q to Q’
DIAGRAM 6: DECREASE IN DEMAND WITH SUPPLY REMAINING UNCHANGED:
In this event, both the price and quantity will decrease, price falls from P to P2, while
quantity falls from Q to Q2.

DIAGRAM 7: INCREASE IN SUPPLY WITH DEMAND REMAINING UNCHANGED:

In this situation, the price decreases from P1 to P2, while the quantity increases from Q1 to
Q2

DIAGRAM 8: DECREASE IN SUPPLY WITH DEMAND REMAINING UNCHANGED

In this case the supply curve shifts to the left from S to S’, this causes the price to increase,
but quantity will fall
SIMULTANEOUS CHANGES TO BOTH DEMAND AND SUPPLY CAN BOTH OCCUR AT THE SAME
TIME:
While this occurrence can happen, the effect on price cannot be determined unless the size
of the both changes are known, let us consider the diagram below:

DIAGRAM 9: SIMULTANEOUS CHANGE IN BOTH DEMAND AND SUPPLY:

As we stated earlier, the effect on price will not be known unless we know the magnitude or
size of the changes of both demand and supply, in the diagram above, it appears that the
change in supply is much more or greater in magnitude than the change in demand, this will
lead to a fall in price from P1 to P2 and also an increase in the market output from Q1 to Q2.
***AGAIN EMILY AND LANA, THE OVERALL CHANGES TO PRICE AND QUANTITY CAN VARY
AS ACCORDING TO THE MAGNITUTE OR THE OVERALL AMOUNT OF CHANGE TO BOTH
DEMAND AND SUPPLY.