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4. Demand and supply

Lead-in:

What factors influence supply and demand?

Key words and phrases

1. demand and supply – попит і пропозиція

2. labour market – ринок працi

3. to offer for sale – пропонувати на продаж

4. homogeneous product – однорiдний, гомогенний товар

5. price elasticity of demand – цінова еластичність попиту

6. quantity demanded – величина попиту

7. elastic demand – еластичний попит

8. necessities and luxuries – предмети першої необхідності та предмети розкоші

9. equilibrium price – цiна рiвноваги

The function of the market is to provide transactions between buyers and sellers, or between the demand side and the supply side. The supply side is made up of firms and the demand side of households or of other firms. In the labour market, it is households which make up the supply side – offering their labour for sale – while production units make up the demand side.

The amount of the goods households will want to buy depends on a broad range of factors. However, one factor, which is likely to influence demand strongly, is the product price. Demand is a consumer’s willingness and ability to buy a product or service. The law of demand states that all else being equal, more items will be sold at a lower price than at a higher price.

Supply varies directly with price. At a higher price more goods and services will be offered for sale than at a lower one, and vice versa.

The laws of supply and demand work most effectively in markets with large numbers of sellers and buyers, who are selling or buying a relatively homogeneous product. In markets that do not possess these features, the forces of supply and demand are determined by the structures prevailing in these markets.

How much the quantity demanded changes in response to price changes is called the price elasticity of demand. The good or service has an elastic demand if the quantity demanded changes considerably, if it is very responsive to changes in price. If the quantity demanded changes little, the good or service has an inelastic demand. Inelastic demand means the quantity demanded responds relatively little to changes in price. Several factors determine if a product has an elastic or inelastic demand schedule. Necessities tend to have an inelastic demand; people find it hard to give up a necessity. Luxuries tend to have an elastic demand, because people can get along without them if the price is too high. The price that equalizes the amount producers want to sell and consumers want to buy is called the market clearing price, or the equilibrium price.