Understanding how market equilibrium is maintained is essential for business managers. As a manager, it is important to understand how economic principles, and specifically supply and demand, are a...

Market equili
ating process
The word ‘market’ does not refer to any particular geographical space instead it is any
place where economic agents such as buyer and seller meet and transacts with each other. The
market equili
ating process can be explained in terms of market demand and market supply and
the interaction between the two.
Market demand and its determinants
Market demand refers to the amount of a particular good that all consumers in the market
are willing at a certain given price and the combination of all such point would derive market
demand curve. The market demand curve is negatively sloped; implying that quantity demanded
of a good is negatively related with its price i.e. if price rises, quantity demanded falls while if
price falls, quantity demanded rises. The negative slope of market demand curve can be
explained by ‘law of demand’ which says, keeping all other things same, we find a negative
elationship between quantity demanded of a good and its price [refer figure1]. The assumptions
made here are followings;
1. No change in tastes and preferences.
2. No change in income of consumer.
3. No change in price of other goods.
4. No expectation of price change in the future.
5. The commodity is normal good.
Figure1:
Given this, we can say that price is one of factor affecting market demand of a product.
More specifically, with change in price, we would have movement along demand curve; when
price rises (or falls), we would move upward (or downward) along a negatively sloped market
demand curve. Apart from price, there are other factors of demand which causes demand curve
to shift. These factors affecting demand (or determinants of demand) can be listed as follows;
1. Price of related goods: Related goods can be of two types:
a. Substitute goods: Substitute goods are those goods whose consumption
can substitute in place of each other and the consumption of any of substitute goods
gives the consumer equal utility. For example, Tea and coffee, Pepsi and Coca cola
etc. Now if the price of substitute good increases, the demand of given good will
increase whereas if the price of substitute good decreases, the demand of given good
will decrease.
b. Complement goods: Complements goods are those goods which always
consumed together and in the same proportion. Consumption of all complement goods
together satisfies a need. For example, Scooter and petrol. Now if the price complement
good increases, demand of given good falls whereas if the price of complement good
decreases, demand of given good rises.
2. Consumer income: For normal goods, income effect is positive i.e. with
increase income, demand rises whereas with decline in income, demand falls. But for
inferior good, income effect is negative i.e. with increase in income, demand of inferior
goods falls whereas with...