Market forces determine how much of each good should be produced and the price at which it should be sold. The force of demand is made up of all the buyers of a good or service. While the offer is made up of all the sellers of those goods and services.
Of course, the interests of the people who buy and those who sell are contrary. A demander prefers a low price to buy and a supplier expresses a preference for high prices to sell their products. When these two forces freely interact in the market they form the market equilibrium.
Clearly, market equilibrium determines the prices and quantities of goods and services that are exchanged. The formation of the equilibrium price is very important because it helps to coordinate the decisions that economic agents must make.
Now, when the price of a good or service is low, it motivates the demanders to buy more, but it discourages its production. On the contrary, when the price is high it stimulates production, but discourages consumption. For this reason, it is important that the price is set freely so that market players agree to buy and sell. When market forces operate freely, companies are price takers.
1. Demand as one of the market forces
Demand is the economic force that manifests purchase intentions within the market. To sue, you need purchase support or have purchasing power to pay for the requested good.
to. demand function
Fundamentally, the demand function establishes an inversely proportional relationship between price and quantity demanded. Thus, as the price falls, the quantity demanded increases, and as the price rises, the quantity demanded decreases. For that reason, it has a negative slope.
b. Changes in Quantity Demanded
Now, changes in quantity demanded occur when market prices change and other factors remain constant. These changes are displayed on the same demand curve, because when the price changes, a new point with a new quantity has to be reflected.
c. changes in demand
For the demand of a market to change, the determinants of demand must change. When a change in demand is illustrated, the demand curve moves to the right if demand increases and to the left if demand decreases.
The determinants of demand are:
- The applicant’s income or income.
- The prices of other goods that are sold in the market. They can be substitutes or complementary.
- The change in tastes, fashions and customs.
2. Supply as one of the market forces
Supply is the set of goods and services that are put up for sale at certain prices in the market. A supplier is willing to sell his goods and services when he considers that the market price allows him to replace his production costs.
to. The function of the offer
Establishes a directly proportional relationship between price and quantity supplied. When the price increases the quantity supplied increases and when the price decreases the quantity supplied decreases. This function is presented in ascending or positive form.
b. Changes in Quantity Supplied
Changes in quantity supplied occur when product prices change and other factors do not change. Representing a change in the quantity supplied is observed in the same supply curve. In this case, each price change relates to a new quantity supplied.
c. Changes in the offer
On the other hand, changes in supply occur when the other determinants of supply, minus price, change. Therefore, the change in supply is graphed as moving the entire curve to the left if supply decreases, while the curve moves to the right if supply increases.
The determinants of supply are:
- The prices of the other goods and services that are sold in the market. Whether disjoint or joint products.
- The price of the factors of production.
- The technological state.
- Business goals and expectations.
How do market forces achieve equilibrium?
Obviously, the movements of the force of supply and demand determine the market equilibrium. When demand or supply changes, they cause the equilibrium price and equilibrium quantity to change. This only causes a change of balance, but this is not lost, there will only be a new balance.
So we can find that:
- Demand increases, price increases, and quantity supplied increases.
- The demand decreases, the price decreases and the quantity supplied decreases.
- Supply increases, price falls, and quantity demanded increases.
- Supply decreases, price increases and quantity demanded decreases.
What can cause market forces not to operate freely?
Market equilibrium is lost when market forces do not operate freely. This can happen due to factors that are unrelated to the functioning of the market.
For example, the intervention of the Government with the application of policies of maximum or minimum prices. Or the centralized economy system, where the government sets prices. Similarly, market imperfections and any externalities that do not allow supply and demand to work freely.
As a conclusion, it can be said that market forces, when they work freely and without imperfections or externalities, allow the market to work efficiently. This, because it helps market demanders and suppliers to make the best decisions. But, when they do not operate freely, the balance is lost and causes that the products are over or missing in the market.