The process of interaction between supply and demand it is the central element of market economies, which are the norm in the world where almost all economies are of a capitalist type. For example: the increase in the price of a fruit as a result of a drought.
The interaction refers to a process in which price levels they are determined by the coincidences in the price to exchange something, between a person who owns it and is willing to part with it, and another who does not have it but would provide some utility.
The offer process comes from the verb offer and refers to the set of mechanisms by which goods reach the market at a certain price. In some cases, it is the producer who establishes a price and hopes that potential consumers will agree to it, or else he must lower it to obtain demand. In the largest economies, the producer delivers his product to other economic agents whose sole function is to offer it.
For the activity to be profitable, the producer must try to obtain, at least, as much money as it spent to produce the good, since it surely had costs: this implies that the bidders are at the same time demanding other things.
It is frequent that supply economic models seek to find what are the determinants that make the appearance of more or less quantities in the market. The essence of the supply and demand model, however, is that these determinations are not objective but are due to an aggregation of the subjective preferences of the users.
However, there are some elements that make the determination of the offer level, following the general rule that the higher the supply (for the same demand) the lower the price, and when the supply is lower the price will rise.
- The technology, since a new way of producing can increase the quantity with the same level of effort.
- The factor costs, which, as has been said, increase the amount that must be sought to compensate for the offer.
- The number of bidders, because if there are more companies, there will be a higher level of supply.
- The expectations, since prices and quantities experience a dynamic trajectory, and many operations can be done at one time or another.
- In agricultural products, the weather is a determinant of supply.
The other side of the process by which products reach the market is the interaction by which they leave it, that is, the user acquisition. It is not necessarily about the acquisition for consumption, since there are goods that are bought to produce others or even that are bought to sell in the future.
The general process of economics tends to assume that bidders determine the price (as explained in the offer case) as the plaintiffs meet him and respond with their decisions. As a general rule, except in the case of special goods called giffen, it can be said that the demand has an inverse trajectory to the price: when the price increases, the demand is lower.
Determinants of demand
In addition to price, there are other factors that come together to determine demand levels:
- The rent that the plaintiffs receive, since the price level that they are willing to pay is usually measured as a portion of their income.
- Their pleasures, and your individual preferences.
- The expectations on future prices and quantities.
- The prices of substitute goods, because there are times when you can stop buying a good and get its utility in another.
- The prices of complementary goods, because there are goods that need others to be consumed.
Examples of supply and demand
Below is a list of supply and demand cases, with particular situations that exemplify the process:
- The increase in the price of a fruit product of a drought.
- The declines in the price of out-of-fashion products.
- The decrease in the demand for cars is the product of significant increases in the price of fuel.
- Changes in the price of clothing for simple fads.
- The anti-monopoly laws, looking for the introduction of many companies to increase the level offered.
- Changes in the price of bonds, where the supply-demand interaction is instantaneous and minute by minute.
- The drop in the quantity produced of certain goods when they are replaced by modern technologies.
- Labor disputes, where job offerors (employees) are always looking for a higher salary and applicants (owners) are looking to pay as little as possible.
- The huge expenditures on advertising, in order to capture more demand.
- Decreases in the price of products out of season.