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Notes on Market and Demand

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Introduction

MARKETS A market is any effective arrangement for bringing buyers and sellers together, not necessarily face to face Eg local, national and international Because resources are scarce they must be allocated to their best (most valued) use. In a free market economy price changes are signals to producers - who are then able to respond to the demands of consumers -, in knowing the demand that consumers have over their product. i.e. supply and demand. So when the price of the product rises - ceteris paribus (e o price do resource continues the same) - the producers know that consumers what more, and therefore gain more profit. DEMANDS Demand is: - 'that quantity of a good or service that would be bought at each and every price over a period of time' - demand is the amount the consumers are willing and able to buy given the price of the product This means that demand combines: EFFECTIVE EMAND * The desire for a product * A willingness to pay for it * The ability to pay for it In other words to count as demand, the demand for something has to be what is known as effective demand. This means that the demand has to be backed by a willingness AND ability to pay The law of demand This assumes that consumers act in a rational manner, so that, other things being equal, the lower the price of a good, ...read more.

Middle

* SEASON AND THE WEATHER For many products, demand will change according to the time of year or the climate. Umbrella manufacturers will undoubtedly increase sales during the winter * POPULATION A rising population generally brings with it rising levels of demand. Growth in the birth rate means that there is a growing demand for health care and education. Companies catering for the taste of young people expand. A population may grow by a fall in the death rate. It will be an ageing population. The demand for hearing aids, rest homes and bowling clubs will increase. THIS IS THE ONLY DETERMINANT THAT WHEN IT CHANGED DOES NOT SHIFTS THE POSITION OF THE DEMAND CURVE Shifts of the demand curve and moves along the demand curve A change in price will produce a movement along an existing demand curve, but a change in one or more of the 'ceteris paribus' factors will shift the demand curve to a new position. N.B. The demand curve is drawn on the assumption that only price has changed and everything else has remained the same. In reality many factors are changing at the same time, but if we are to analyse the factors causing a change in the market, we first need to isolate each of the factors. This assumption, known as 'ceteris paribus' enables us to do this. ...read more.

Conclusion

Hence products of this kind are known as Giffen goods. --> when price of rice rises, the price of the other foods are also rising, bec of war / inflation, so people chose to buy only rise bec it sustains more. Veblen good - ostentatious good Examples of Giffen goods are difficult to find in richer countries. Some text books do suggest that after-shave or perfume come into the same category but this is not the case. With these products a rise in price is often interpreted by the consumer as an increase in quality and so they may decide to buy more, thinking that they are buying a superior product. There may be psychological factors at work. The economist Veblen carried out research into this and concluded that the price of a product conveyed more than just value information for the consumer; it also represented status and exclusivity. These products which appear to experience rising demand with rising price are known as Veblen goods. IN BOTH CASES, WHEN PRICE RISES PEOPLE BUY MORE, WHEN PRICE DECREASES PEOPLE BUY LESS, THE ONLY DIFFERENCE IS THE TYPE OF GOOD. Price expectations It is also possible for goods where price expectations are critical to have perverse demand curves. This is because if people expect prices to increase further, then they may buy more now. In this case it appears that an increase in price has increased demand, but in reality this has come about because people expect prices to rise even further in the future. ...read more.

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