The law of demand tells us, that ceteris paribus, the lower the price, the greater the quantity demanded and vice versa. Xavier is willing and able to pay the most for the initial units of the good or service, but is quickly satisfied. With a pure private good, the Market Demand Curve is the horizontal summation of all individual's demand curves. So that at each price, the market quantity is the quantity Xavier will purchase plus the quantity Yves will purchase plus the quantity Zelda will purchase. The relationship between price and the quantity demanded by the entire market is the market demand curve.
The success of economic freedom of a country is naturally reflected in the form of human prosperity. This discussion aims at shedding some light on the flow of economic activity in a free market economy.
Added advantage of a free market enterprise is that, the effortlessness with which one can enter and exit the market.
Essentially countries have to go in for suitable economic restructuring that promotes equality and even distribution of wealth. Wall Street protest in US is a clear-cut indication of strained market economy which is a result of people’s fury against the prevailing economic inequality. Supply-Demand Market EquilibriumConsider a farmers market, where the farmers are selling cantaloupes. Prices Ration the Production and Distribution of Products and ServicesIn a highly competitive market, sellers must set the price of their product so that they can sell what they have. The following diagram shows how changes in non-price demand and supply determinants can change the market equilibrium. Slideshare uses cookies to improve functionality and performance, and to provide you with relevant advertising. While Zelda is more frugal, but when the price is very low, she is willing and able to buy the most. Countries like India are evidencing a consistent increase in their annual GDP rates which obviously must have reduced the population percentage living below poverty line; yet this has not been accomplished and the question is, is it really something to do with the economic model or is it the bureaucracy and inefficiency the root cause for the strain in the economy? The elemental players or contributors in a free enterprise market economy are individuals and firms. One is the product market where the products are bought and sold and the other being a market for production factors, where the inputs such as labor, capital and natural resources are traded. Here the individual becomes the supplier of production factors and hence the money flows from firms to individuals and factors of production from individuals to firms. The activity flow proves advantageous to each person involved .Firms make profits, individuals are satisfied of their consumption demand for goods and services, resource owners are compensated for their services.
On the first day, they offer their cantaloupes for $5 apiece, but few people buy them, so as the end of the day draws near, the farmers find that they have a surplus of cantaloupes.
Hence, prices have a rationing function in that those sellers who are willing to sell at the equilibrium price will be able to sell all of their product, while buyers who are willing to pay the equilibrium price will be able to buy all that they want.


In the first diagram, the supply curve shifts rightward, from S1 to S2, representing an increase in supply caused by non-price supply determinants, causing the equilibrium price to decline from P1 to P2 and the equilibrium quantity to increase from Q1 to Q2. Information is also shared about your use of this site with our social media, advertising and analytics partners. Individuals who own or control resources (in the form of labor, capital or natural resources), sell these resources to firms and obtain money.
Prices and profits control the flow of money and resources through the factor market and flow of money and goods through the product market.
If an individual is not able to benefit by trading in these markets, he or she is not required to do so or free to leave the market which ensures that nobody is made worse off by voluntary trade in these markets. Consequently, the farmers drop the price of their cantaloupes to $1, quickly selling their surplus. The sellers, who are unable or unwilling to sell their product for the equilibrium price, will stop producing it. In the 2nd diagram, it is the demand curve that shifts rightward, from D2 to D1, representing an increase in demand from demand determinants other than price, causing the equilibrium price to increase from P1 to P2 and the equilibrium quantity to increase from Q1 to Q2. These resources which serve as necessary inputs in the production process add value to firms. Profit is the primary motive of any firm and the priority of a firm lies in responding to the demands of the consumer market by supplying goods and services to the potential and prospective buyers.
For most products, as their price increases, the supply increases but the demand decreases.
Likewise, only the buyers who are willing to pay the equilibrium price will get the product. The money received by individuals is called factor payment which is utilized to fulfill their consumption demands of goods and services. If the sellers raise their price too high, where the demand is less than what they have to offer, then they will have a surplus that will force them to lower their price until they can sell their entire supply.On the other hand, if the sellers set their price too low, then they will sell their entire supply before they can satisfy the demands of the market, thereby causing a shortage for the buyers and lesser profits or greater losses for the sellers.
Those who do not desire the product as much will be unwilling to pay the equilibrium price. If the change in supply is greater than the change in demand, then the same analysis applied to shifts in the supply curve while the demand remained constant applies here also. Some people who wanted to buy the product will be unable to obtain it.Supply increases with prices because the suppliers earn greater profits and can easily cover their costs. This is how the resources of an economy are allocated to produce the most desirable products.How Market Equilibrium Changes in Response to Non-Price Changes in Supply and DemandAlthough prices change both supply and demand quantities, demand and supply determinants other than prices can also change either demand or supply, in which case, they will also change the market equilibrium. If the change in demand is greater than the change in supply, then the market equilibrium changes in the same direction as when the supply was held constant.Example — Ticket Prices and ScalpingA good example of the economics of supply and demand can be found in how tickets are sold.
The price of the product and quantity sold is a result of the interaction between demand and supply. Demand increases with lower prices because the products become more affordable and the buyers get more value for their money.


If only prices change, then the law of supply and demand will cause both quantity and price to revert back to the equilibrium. When promoters of big events want to sell tickets, they price their tickets so that they can sell enough to fill the seats that are available.
In a product market money flows from consumers to firms and goods and services flow from firms to consumers. Because people only buy a product if the benefit is at least equal to its cost, and because people's preferences vary widely, a lower product price will have a benefit worth the cost for more people, thus increasing demand. However, if other determinants causes changes in either demand or supply, then the market equilibrium also changes, because either the demand curve or the supply curve or both shifts.Supply determinants other than prices include the prices of the factors of production used to create the product, technology, taxes and subsidies, number of sellers, price expectations, and the prices of other related goods.
However, there are always some people who are willing to pay a lot more, especially after all of the tickets have been sold out.
This is why when demand and supply quantities are plotted according to price, the supply curve moves upward with price, while the demand curve moves downward with price. If supply determinants increase supplies, while the demand remains constant, then the equilibrium price will decline, because it must adjust to the new, higher equilibrium quantity, which can only be sold at lower prices.
Ticket scalpers seek to satisfy the needs of these people by providing tickets at higher prices. When the amount demanded is equal to the amount supplied, then equilibrium is achieved, known as the market equilibrium (aka supply-demand equilibrium), where the quantity is equal to the equilibrium quantity and the price is equal to the equilibrium price. Supply determinants that decrease supplies will cause the equilibrium price to rise, since it will take fewer buyers to buy the product at the higher price and only those who are willing to pay the higher price will buy it.Demand determinants other than the product price include consumer preferences, income, prices of substitutes and complements, and the number of buyers. Like the big event promoters, ticket scalpers want to be able to sell all that they have — otherwise, they will have unsold tickets that will reduce their profits by the amount paid for the unsold tickets.
Furthermore, if prices are different from the equilibrium price, then the law of supply and demand states that the price of any product will adjust until the supply equals the demand.
If the supply remains constant, but non-price demand determinants increase demand, then the equilibrium price will rise, since the equilibrium quantity will also increase, and the suppliers will only supply more product at a higher price. Although some people consider scalping unethical, and in some places, it is even illegal, the ticket scalpers are simply providing a service to people who really want to see the event but were unable to get tickets for one reason or another.
Likewise, if demand decreases because of factors other than price, then the equilibrium price will decline, since suppliers will only be able to sell the new, lower equilibrium quantity of their product.
Although the late buyers are paying higher prices, they are willing to pay the higher prices to see the event.



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