Market mechanism

PPT

1. Market MechanismMarket Mechanism

2. What is market?What is market?
Literal meaning-Literal meaning-Place where goods and services arePlace where goods and services are
brought and soldbrought and sold
In economics-In economics-
It is used in abstract sense.It is used in abstract sense.
According to SAMUELSON & NORDHAUS According to SAMUELSON & NORDHAUS
A market is a mechanism by which buyers & sellersA market is a mechanism by which buyers & sellers
interact to determine the price & quantity of a good or interact to determine the price & quantity of a good or
service.service.
Sellers & buyers- individuals, firms, factories, dealers & Sellers & buyers- individuals, firms, factories, dealers &
agentsagents

3. Features of market conceptFeatures of market concept
•A market need not be situated in a particular locality or A market need not be situated in a particular locality or
areaarea
•Buyers & sellers need not come into personal contact Buyers & sellers need not come into personal contact
with each otherwith each other
•Word market may refer to a commodity / service or to a Word market may refer to a commodity / service or to a
geographical areageographical area
•Economists distinguish market on the basis ofEconomists distinguish market on the basis of
Nature of goods & services (input market, output market)Nature of goods & services (input market, output market)
No. of firms & degree of competition. (competitive mkt., No. of firms & degree of competition. (competitive mkt.,
monopolistic market)monopolistic market)

4. What is market mechanism?What is market mechanism?
The market for a product works on certain market The market for a product works on certain market
principles i.e. the laws that govern the working of principles i.e. the laws that govern the working of
the market system, also called market mechanismthe market system, also called market mechanism
Working of the market system is governed by certain Working of the market system is governed by certain
fundamental laws of market called fundamental laws of market called Law of Demand Law of Demand
and Supply.and Supply.
Clear understanding of this is required for chalking Clear understanding of this is required for chalking
out an appropriate market strategy.out an appropriate market strategy.

5. Supply side of the marketSupply side of the market
Some important terms in this:-Some important terms in this:-
Supply-Supply- It is the quantity of a commodity that its It is the quantity of a commodity that its
producers/ sellers offer for sale at a given price, per unit producers/ sellers offer for sale at a given price, per unit
of time.of time.
Market supply-Market supply- Sum of suppliers of a commodity made Sum of suppliers of a commodity made
by all the individual firms or their supply agencies. by all the individual firms or their supply agencies.
Market supply of product is governed by the law of Market supply of product is governed by the law of
supply.supply.
Supply of a commodity depends on:-Supply of a commodity depends on:-
1.Its price1.Its price
2.Cost of production.2.Cost of production.

6. Law of supply-
Supply of a product – Increase in price
And vice versa all the other factors remaining constant.
Other things – technology, price of related goods, weather
& climatic conditions in case of agricultural goods.
Supply schedule- A supply schedule is a tabular
presentation of the law of supply.
Supply curve- Graphical representation of supply
schedule.

7. Price
Quantity supplied per unit of time

8. Supply function- It is a mathematical statement which
states the relationship between the quantity supplied of a
commodity and its price.
Q
x
= 10P
x
Q
x
= quantity supplied of commodity X
per unit of time
P
x =
Its Price

9. How determinants of supply How determinants of supply
causes shift in supply causes shift in supply
curve?curve?
1. Change in Input prices-
Input prices – Use of inputs
As a result, Product Supply
Supply curve SS shifts to the right to SS’ Supply curve SS shifts to the right to SS’
When input Price increases, product supply curve shifts toWhen input Price increases, product supply curve shifts to
SS’’SS’’

10. Quantity
Supply CurveSupply Curve
Price

S
S’
S’’

11. 2. Technological Progress-
Technological changes that ------ Product Supply
reduce cost of production or
increase efficiency in production
3.Price of product substitutes-
Fall in the price of --------- Supply of other
one of the product ’s
substitutes
4.Nature & Size of the industry-
Depend on whether an industry is monopolized or
competitive.
Under monopoly -------- Supply is fixed
If monopolized industry ------- Total supply
is made competitive

12. If size of an industry ------- Total supply
due to new firms
joining the industry
5. Government policy-
When govt. imposes --------- Production tends to fall
restrictions on production
Supply
6.Non economic factors –
Labor, strikes, lockouts, communal riots, epidemics, affect
supply

13. Market equilibrium- Market equilibrium-
equilibrium of demand & equilibrium of demand &
supplysupply
Determination of price in a Free marketDetermination of price in a Free market
Free market – Free market – is one in which the market forces of is one in which the market forces of
demand & supply are free to take their own course & demand & supply are free to take their own course &
no outside control on price, demand & supplyno outside control on price, demand & supply
Market equilibriumMarket equilibrium – – Refers to a state of market in Refers to a state of market in
whichwhich
Quantity demanded = Quantity supplied Quantity demanded = Quantity supplied
of a commodity of a commodity
of the commodity of the commodity
Equality of demand and supply produces equilibrium Price Equality of demand and supply produces equilibrium Price
It is also called It is also called Market Clearing PriceMarket Clearing Price because market because market
isis
cleared in the sense that there is no unsold stock and no cleared in the sense that there is no unsold stock and no
unsupplied demandunsupplied demand..

14. Determination of market priceDetermination of market price
In a free market, disequilibrium itself creates the In a free market, disequilibrium itself creates the
condition for equilibrium.condition for equilibrium.
When there is excess supply, it forces downwardWhen there is excess supply, it forces downward
adjustment in the price & quantity supplied.adjustment in the price & quantity supplied.
When there is excess of demand it forces upward When there is excess of demand it forces upward
adjustment in the price & quantity demanded.adjustment in the price & quantity demanded.
Process of downward & upward adjustment in price Process of downward & upward adjustment in price
determines till price reaches equilibrium and the determines till price reaches equilibrium and the
quantities supplied and demanded are in balancequantities supplied and demanded are in balance
This process is automatic.This process is automatic.

15. Market mechanism: How
market brings balance?
Market mechanism: Process of interaction between the
market forces of demand & supply to determine
equilibrium price.
2)If
Supply with demand
Then it gives sellers an opportunity to raise its price & it
prepares buyers to accept & pay higher price. As result
price goes up.
So we conclude that :-
If Supply with demand ------Prices

16. 2) If
Supply with demand
Excess supply forces the competing sellers to cut down
the price in order to clear their unsold stock.
Some firms find low price unprofitable & go out of the
market.
Some cut down their productivity, supply goes down
Thus we conclude that :-
If Supply with demand ------- Prices

17. Quantity
Demand, Supply, and Demand, Supply, and
Market Price Market Price
Price
Supply
Demand
EE

18. Quantity
SurplusSurplus
Price
Supply
Demand
E
Surplus
The equilibrium condition is not fulfilled at any other point on the
demand and supply curves. Therefore, there would be either
excess supply or shortage.

19. Quantity
ShortageShortage
Price
Supply
Demand
E
Shortage
The equilibrium condition is not fulfilled at any other point on the demand
and supply curves. Therefore, there would be either excess supply or
shortage.

20. Shift in Demand and Supply Shift in Demand and Supply
curves and equilibriumcurves and equilibrium
O
Quantity
D
D’’
D’
D
P
M
QN
S
S Shift in demand
curve and
equilibrium
Price

21. Quantity
S
S’’
D
D
P
M
QN
S
S’
Price
Shift in Supply
curve and
equilibrium

22. Quantity
Price
S
S3
D1
D
E1
Q1
S
S1
P1
D2
P0
Q3
E3
E2
Q2
D
S
S3
Parallel shift in Demand Supply
curve and its effect on equilibrium
price and output
Simultaneous Shift in Demand Simultaneous Shift in Demand
and Supply curvesand Supply curves

23. Parallel shift in Demand Supply
curve and its effect on equilibrium
price and output
Quantity
S
S2
D1
D
E1
Q1
S
S1
Price
P1
D2
P2
Q2
E2
D