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Direct supply and demand economics. Supply and demand. Laws and schedules. Factors influencing proposals

1. Demand and its function. To build a clear market model, it is necessary to study, under ideal conditions (with perfect competition), the interaction of the most important categories of the market - supply and demand, behind which are buyers and sellers.

Demand is the quantity of goods (services) that buyers are willing to purchase on the market.

The amount of demand depends on a number of factors. This dependence is usually called function of demand.

Qda= f (Pa, Pb...z, K, L, M, N, T),(10.1)

Where Qda– demand function for the product; Pa- the price of the product; Pb...z– prices of other goods, including substitute and related goods; K– cash income of buyers; L– tastes and preferences of people; M– consumer expectations; N– total number of buyers; T- accumulated property of people.

The main factor of demand is the price of the product, so the relationship can be simplified:

Qda= f(Pa).(10.2)

The demand function can also be represented as a graph (Fig. 10.1).

Rice. 10.1.Demand function

Connecting points on a graph, each of which is a specific combination of price and quantity, allows you to construct a demand curve D.

2. Sentence and its function.Offer– this is the quantity of goods (services) that sellers are willing to sell on the market. Like demand, it depends on a number of factors and can be formalized.

Qsa = f ( Pa, Pb...z, C, K, R, N), ( 10.3)

Where Qsa– product offer; Pa- the price of the product; Pb...z – prices of other goods, including substitute and related goods; C– availability of production resources; K– technology used (time); R– taxes and subsidies from manufacturers; N– number of sellers.

The main factor of supply is the same as demand - price.

Qsa= f(Pa). (10.4)

The supply function can also be specified using a table, which can be easily converted into a graph (Fig. 10.2).

Rice. 10.2.Suggestion function

Connecting points on a graph allows you to construct a supply curve S, which has an ascending appearance.

3. Market equilibrium. The market brings together buyers and sellers, as a result of which supply and demand tend to overlap.

If the interests of sellers and buyers coincide, then market equilibrium arises.

Equilibrium price- this is the result of a large number of transactions on the market (although it appears to each of the sellers and buyers as pre-existing) (Fig. 10.3).

Rice. 10.3.Market equilibrium

P- price, rub); D- demand; Q– product (pieces); S- offer.

The price equilibrium of the market is stable, since any volitional actions to change the price on the part of sellers cause an opposite reaction on the part of buyers and vice versa. Overpricing leads to overstocking and causes the need to reduce the price, while underestimation leads to shortages and a subsequent rise in prices.

4. Economic law of supply and demand. The inverse relationship between price and demand is called law of demand which, like all other economic laws, is not absolute and manifests itself only on a mass scale.

The law of demand has an exception: essential goods are not subject to its action; when the prices for which increase, demand does not decrease (salt, bread, etc.). The range of such goods depends on national characteristics and consumption traditions. In economic theory they are usually called Giffen goods, named after the English explorer of the 19th century.

The manifestation of the law of demand is also complicated:

– the effect of prestigious consumption (Veblen effect), when people specifically buy expensive goods to stand out from the rest;

– rush demand for scarce goods, etc. The action of the law of demand in conjunction with supply is often called the law of supply and demand.

5. Changes in supply and demand. If the price changes, then supply and demand do not change, but only increase or decrease, moving along the curve to a new position (Fig. 10.4).

Rice. 10.4.Increase and decrease in supply and demand

Supply and demand are influenced by other factors besides price. If other factors change, supply and demand change, which is expressed in a shift of the curves to the right or left (Fig. 10.5).

Rice. 10.5. Changes in supply and demand

For any product or service, this is the consumer’s desire and ability to buy a certain quantity of a product or service at a certain price in a certain period of time.

There are:

individual demand is the demand of a specific subject;
market demand is the demand of all buyers for a given product.

Volume of demand- this is the quantity of a good or service that consumers agree to buy at a certain price during a certain period of time.

A change in quantity demanded is a movement along the demand curve. Occurs when the price of a product or service changes, all other things being equal.

Law of Demand: other things being equal, as a rule, the lower the price of a product, the more the consumer is willing to buy it, and vice versa, the higher the price of the product, the less the consumer is willing to buy it.

What factors influence demand?

Factors influencing demand:

consumer income;
tastes and preferences of consumers;
prices for interchangeable and complementary goods;
inventories of goods from consumers (consumer expectations);
product information;
time spent on consumption.

If other factors change and the price of the product remains constant, the demand itself will change. As a result of changes in demand, consumers are willing to buy more (or fewer) goods than before at the same price, or are willing to pay a higher price for the same quantity of goods.

What is an offer?

Offer of any good or service is the willingness of the producer to sell a certain quantity of a good or service at a certain price over a certain period of time.

Supply volume- the quantity of a good or service that sellers are willing to sell at a certain price during a certain period of time.

The relationship between volume and supply price is expressed in law of supply: Other things being equal, the quantity supplied of a good increases if the price of the good increases and vice versa.

What factors influence supply?

Factors influencing proposals:

changes in prices for factors of production;
technical progress;
seasonal changes;
taxes and subsidies;
manufacturers' expectations;
changes in prices for related products.

A change in the volume of supply occurs if all the factors determining the supply of a product remain constant, and only the price of the product in question changes. Thus, if the price changes, then there is a movement along the supply line.

When other factors that determine supply change and the price of the product remains constant, the supply itself changes, and the supply line on the graph shifts.

What is market equilibrium?

The supply and demand lines intersect at the point where the price at which buyers are willing to buy a certain quantity of a good equals the price at which producers are willing to sell the same quantity of a good. The point of intersection of the supply (S) and demand lines, point E, is called the equilibrium point. When the market is at this point, the established price suits both buyers and sellers and they have no reason to demand its change. This state of the market is called market equilibrium.

The sales volume at this point is called the equilibrium market volume (Qe). The price at this point is called the equilibrium (market) price (Pe).

Thus, market equilibrium is a market condition in which the volume of demand is equal to the volume of supply.

If the price prevailing on the market differs from the equilibrium price, then under the influence of market mechanisms it will change until it is established at an equilibrium level and the volume of demand becomes equal to the volume of supply.

This law establishes a stable cause-and-effect relationship between three economic phenomena - price, demand and supply. Demand - this is an ideal need and a real opportunity for a buyer to buy a certain quantity of goods. The concept of demand has 2 aspects: - the consumer’s ideal desire to purchase this product, because it has utility for a given buyer; - a real opportunity to buy this product, i.e. availability of money.

Offer - this is the ideal readiness and real opportunity of a commodity producer to produce and supply a certain quantity of a given product to the market. This concept also has 2 aspects: - the willingness of the commodity producer to produce and supply the forecasted product to the market; - the real opportunity of the commodity producer to produce and supply the forecasted product to the market.

Factors influencing supply and demand:

a) the price determines the buyer’s real opportunity to purchase this product (income and price are decisive here);

b) the volume of supply for each commodity producer depends on the price (at a high price, the commodity producer seeks to sell more of it, increasing production, at a low price, to reduce the supply of goods).

Law of Demand and Law of Supply

Law of Demand- an increase in the market price, other things being equal, reduces the volume of demand, on the contrary, a decrease in price increases it.

Law of supply - the quantity supplied of a good increases when the price increases and decreases when the price decreases.

Equilibrium of supply and demand - is called partial market equilibrium, and the price at which it occurs is called the equilibrium price. Russian paradox. Elasticity problem After 1992, the “Russian paradox” happened when prices rise, but production volume decreases from year to year. A. Marshall introduced the concept into economics elasticity of supply and demand: he took as a basis a price change of 1% Price elasticity of demand shows by what percentage the demand for a given product changes if its price changes by 1%.

If this indicator is greater than 1, then price demand will be elastic; if this indicator is less than 1, then price demand will be inelastic. Price elasticity of supply is determined in a similar way, which characterizes the degree of change in the volume of supply depending on changes in price. Like demand, supply can be elastic, inelastic and singular.

Three mysteries of the law of supply and demand:

1) This is an assumption that all other conditions are equal. By depicting a demand curve or supply curve, we analyze what happens to the quantity of a good purchased over a period of time when all other factors, except the price of a given good, do not change. For in order to know the effect of one particular factor, we must abstract from others. Change incomes, change the prices of substitute goods, and all conditions change.

2) Two concepts should be distinguished: a change in the volume of demand (only the price changes, all other factors are unchanged; a change in demand itself (the nature of the demand itself changes, i.e. the demand curve shifts either to the right or to the left). Similarly to demand, a change in volume should be distinguished supply and a change in supply itself. The volume of supply changes when only the price changes. A change in supply occurs when other factors that were previously taken as constant change.

3) In what sense is demand and supply equal at the equilibrium point - at the point of intersection of the demand curve and the supply curve, the quantity of goods that the consumer would like to buy and the producer would like to sell coincides. And only at a price that fixes these desires of two market subjects, the price does not tend to change.

Welcome to Financial Genius! Today I want to talk about a very simple but very important topic - supply and demand in the market. It is these two indicators that have a tremendous impact on many other economic values that are important for each individual person: prices, wages, inflation, devaluation, jobs, return on assets and much more. What are supply and demand, how are they related to each other, how are they characterized - you will learn about all this from today’s article.

So let's start with definitions. They will be very simple.

Demand– this is the desire and ability of the buyer to purchase a certain product or service from the seller.

Offer– this is the desire and ability of the seller to sell a certain product or service to the buyer.

Let me immediately draw your attention: the definitions contain two concepts: “desire” and “opportunity”, which must be considered together. If there is only desire and no opportunity, or vice versa, this cannot in any way influence supply and demand.

What determines supply and demand in the market?

Now let's look at what supply and demand in the market depend on, what factors influence them. We will consider them separately in the context of each category.

Factors influencing demand:

People's income level. The higher it is, the higher the demand for goods and services. Moreover, the level of income most affects the demand for non-essential goods and services, goods and services of a high price category. But income levels have the least impact on everyday goods and services.
Target market audience. The wider the target market audience for any product or service, the higher the demand for it, and vice versa. For example, the demand for bread will be orders of magnitude higher than the demand for aquarium fish.
Season and fashion. Another important factor that has a tremendous impact on the demand for seasonal goods and services. For example, in summer the demand for sleds will be practically zero, but with the first snow it will increase significantly. As for fashion, this factor also always influences demand - this is one of the characteristic features of the world in which we all live now.
Availability of analogues of goods and services, level of market monopolization. If a product or service is unique in its kind, the demand for it will always be higher than for goods and services that have many analogues. Also, the demand for the products of monopoly enterprises will also always be high. For example, on .
Expectations of inflation and devaluation. And the last factor influencing demand, which is now becoming increasingly stronger, is expectations. When a person feels that the price of a product he needs will soon rise (inflation will occur), or his money will depreciate (devaluation will occur), he will try to buy it faster, to stock up even under current conditions. Thus, inflation expectations always stimulate an increase in demand for almost all goods, and actual inflation and devaluation, on the contrary, reduce demand, because the ability to make purchases (purchasing power) decreases.

Factors influencing supply:

Production capabilities. The more goods or services resources, capacities, and technologies allow to be released onto the market, the greater the supply can be. However, the offer will not necessarily be the maximum, since it also depends on further factors.
Tax policy. The softer the tax system for producers of goods and services, the more they will be produced, and the higher their supply on the market will be.
Offer of related, complementary, and replacement products. If goods or services act as some kind of connecting link in a more complex production chain, or somehow complement other goods and services, then the supply of the main and additional goods will always be comparable. For example, the supply of bottles for lemonade will be focused on the volume of production of lemonade itself. Also, the more substitute goods there are on the market, the less supply of a particular product will be.
Target market audience. This factor simultaneously affects supply and demand in the market. It makes no sense to offer a product or service more than it is in demand, so the narrower the target audience, the smaller the supply, and vice versa.
Availability for business. The final supply factor I want to look at is the real opportunity to create goods and services. This includes the level and ease of opening and running a business, and everything connected with it. The easier it is to open and run a business, the higher the supply of goods and services will be.

Now that you have an idea of what supply and demand in the market depend on, let’s move on.

Law of supply and demand.

In economic theory there is such a thing as the law of supply and demand (sometimes it is divided into separate components: the law of demand and the law of supply). It is as follows.

Law of supply and demand: as the cost of goods and services increases, the demand for them falls, and supply increases, with other factors remaining constant.

Of course, this law is not ideal and cannot be strictly followed in all conditions. Since a decrease in demand and an increase in supply with rising prices will contradict each other, and at some point the reverse process may begin.

Therefore there is such a thing as supply and demand balance– this is a market situation in which these 2 parameters are optimally combined with each other.

Finding the equilibrium point between supply and demand is to increase the price of a product and the quantity of goods produced as much as possible, but until this leads to a drop in demand. This can be clearly depicted in the following graph:

Here you see supply and demand curves(as a rule, they are in just such an inverse, nonlinear relationship). Supply and demand curves show the dependence of these parameters on the quantity of a good or service and price.

The graph clearly shows how the law of supply and demand is observed: as the price of a product increases, supply increases and demand decreases. However, it is immediately clear that if the price increases excessively, the supply of the product will absolutely not correspond to the demand for it, and the higher the price increases, the stronger this discrepancy will be.

Therefore, the manufacturer of a product or service seeks the balance of supply and demand in the market, that is, the point on the graph where the supply and demand curves intersect. It is at this point that the manufacturer will earn the most, and the consumer will be satisfied with the price.

However, this is all good in theory. In practice, it often happens that a manufacturer or seller simply cannot keep the price at the level of equilibrium between supply and demand on the market, since, due to the action of other factors influencing supply, such a price will be unprofitable for him, since it will not even cover the cost.

Does demand determine supply or does supply determine demand?

And in conclusion, I would like to give my answer to this tricky question. What depends more on what: supply on demand or demand on supply?

In economic theory, the first answer has always been assumed: demand determines supply, the greater the demand, the greater the supply. In general, everything here is correct and logical.

However, in modern conditions, in the consumer society, which I already mentioned above, the opposite is often the case. That is, first a certain supply appears on the market, for which there is absolutely no demand yet, which may even be unknown to consumers, and this supply already generates demand. Roughly speaking, demand can be imposed on consumers in this way.

A typical example of this situation would be a selfie monopod. Just a few years ago, no one even knew what it was; the demand for this product was zero. And look how popular this thing is now!

Now you know what supply and demand are in the market, how they are formed, what factors influence them, and how they depend on each other. I hope that this information was useful to you and will contribute to the development of your financial literacy.

Stay tuned - here you will find a huge amount of other informative and interesting materials in the field of finance and economics. See you again!

A market is a mechanism that brings together buyers (demand providers) and sellers (suppliers) of individual goods and services. At the same time, markets take on different forms. Let us dwell on the characteristics of purely competitive markets. Purely competitive markets involve a large number of independently acting buyers and sellers interested in exchanging standardized products. What is meant here is not a store, but markets such as a central commodity exchange, a stock exchange, or a foreign exchange exchange, where the equilibrium price is “revealed” through the agreed decisions of buyers and sellers. Based on the premise, a market economy is based on the operation of objective economic laws; let us study the law of supply and demand.

Law of Demand

The law of demand states that there is a negative, or inverse, relationship between price and quantity demanded. Demand is depicted as a graph showing the quantity of a product that consumers are willing and able to buy at some price possible over a certain period of time. It shows the quantity of a product for which (other things being equal) will be demanded at different prices.

The fundamental property of the law of demand is the following: with all other parameters remaining constant, a decrease in price leads to a corresponding increase in the quantity of demand. And, on the contrary, other things being equal, an increase in price leads to a corresponding decrease in the quantity demanded.

The law of demand can be explained by the income and substitution effects. The income effect indicates that at a lower price a person can afford to buy more of a given product without denying himself the purchase of any alternative goods. A higher price leads to the opposite result.

The substitution effect is expressed in the fact that at a lower price, a person has an incentive to purchase a cheap product instead of similar products that are now relatively more expensive. Consumers tend to replace expensive products with cheaper ones. The income and substitution effects combine to result in the consumer being able and willing to buy more of a product at a lower price rather than a higher price.

Determinants of demand

Price is the most important determinant of the quantity of any product purchased. However, the economist knows that there are other factors that influence purchases.

These include non-price determinants, or so-called demand change factors:

1) consumer tastes;

2) number of buyers;

3) consumer income;

4) prices for related goods and

5) consumer expectations regarding future prices and incomes.

Let's consider the impact on demand of each non-price determinant:

1. Consumer tastes.

Technological changes in the form of a new product, or advertising, or changes in fashion can lead to changes in the demand for certain goods. For example, the advent of compact discs led to a reduction in the demand for records.

2. Number of buyers.

An increase in the number of consumers in the market causes an increase in demand, and a decrease in the number of consumers causes a decrease in demand.

3. Consumer income. For most goods, an increase in income leads to an increase in demand.

As incomes rise, consumers tend to buy more steaks, stereos, and whiskey. And, conversely, when income decreases, the demand for such goods falls. Goods for which demand changes in direct connection with changes in money income are called normal goods.

4. Prices for related goods.

When two products are substitutes, there is a direct relationship between the price of one and the demand for the other. This is exactly the case with sugar and sugar substitutes, tea and coffee, etc. When two goods are complementary, there is an inverse relationship between the price of one of them and the demand for the other. For example, the demand for gasoline and motor oil are conjugate - these are complementary goods. The same applies to video recorders and cassettes, cameras and film, etc. Many pairs of goods are not interrelated at all. These are independent, stand-alone products. For such pairs of goods, such as bananas and wristwatches, we can assume that a change in price will have little or no effect on the price of the other good.

5. Consumer expectations regarding future prices and incomes.

Consumer expectations about factors such as future commodity prices, product availability, and future income can change demand. Consumers' expectations about the possibility of future price increases may motivate them to buy now to "pre-empt" threatening price increases; conversely, the expectation of falling prices and lower incomes leads to a reduction in current demand for goods.

A change in demand means that the demand curve changes its position either to the right (an increase in demand) or to the left (a decrease in demand). The cause of a change in demand is a change in one or more determinants of demand.

In contrast, a change in the quantity demanded is a movement from one point to another point on the demand curve, that is, a transition from one combination of “price - quantity of product” to another combination of them. The reason for a change in the quantity demanded is a change in the price of a given product.

Law of supply

The law of supply states: there is a direct relationship between price and quantity supplied. Supply is depicted as a graph showing the different quantities of a product that a producer is willing and able to produce and offer for sale in the market at any given price out of a range of possible prices over a specified period of time. The fundamental property of the law of supply is the following: with an increase in prices, the quantity of supply increases accordingly; and, on the contrary, as prices fall, supply decreases. The law of supply shows that producers want to produce and offer for sale more of their product at a high price than they would like to do at a low price.

Determinants of supply

Price is the main determinant of the supply of any product. However, there are non-price determinants of supply. If one of the non-price determinants actually changes, the position of the supply curve will change.

Non-price determinants of supply include:

1) prices for resources;

2) production technology;

3) taxes and subsidies;

4) prices for other goods;

5) expectations of price changes;

6) the number of sellers in the market.

Let's take a closer look:

1. Prices for resources.

A firm's supply curve is based on its production costs. It follows that a decrease in resource prices will reduce and increase supply, that is, it will move the supply curve to the right. Conversely, an increase in resource prices will increase production costs and reduce supply, i.e., shift the supply curve to the left.

2. Technology.

Improving technology means that the discovery of new knowledge makes it possible to produce a unit of output more efficiently, i.e., with less resource consumption. At these resource prices, costs will decrease and supply will increase.

3. Taxes and subsidies.

Businesses view most taxes as costs of production. So raising taxes on, say, sales or property, increases production costs and reduces supply. On the contrary, subsidies are considered a “tax in reverse.”

4. Expectations.

Expectations of changes in the price of a product in the future may also affect a manufacturer's desire to market the product at the present time. For example, the expectation of a significant increase in the price of an automobile firm's product may induce firms to increase production capacity and thereby cause an increase in supply.

5. Number of sellers.

For a given output of each firm, the greater the number of suppliers, the greater the market supply. As more firms enter the industry, the supply curve will shift to the right. The smaller the number of firms in an industry, the smaller the market supply. This means that as firms exit the industry, the supply curve will shift to the left.

The difference between a change in supply and a change in quantity supplied is the same as the difference between a change in demand and a change in quantity demanded. A change in supply is reflected in a shift in the entire supply curve: an increase in supply shifts the curve to the right, a decrease in supply shifts it to the left. The reason for a change in supply is a change in one or more determinants of supply. On the contrary, a change in the quantity supplied means a movement from one point to another point on a constant supply curve. The reason for this movement is a change in the price of the product in question.

Market equilibrium and equilibrium price

The concepts of supply and demand can now be brought together to figure out how the market determines the price of a product and the quantity that is actually bought and sold.

The point of intersection of the downward sloping demand curve and the upward sloping curve shows the equilibrium price and quantity of the product; Only at this price is the quantity produced equal to the quantity that consumers are willing and able to buy. At the intersection point, the quantity supplied and the quantity demanded are balanced. It acts as the only stable price. Any price below the equilibrium entails a shortage of the product. Conversely, a price higher than the equilibrium price leads to a surplus of product. The ability of competitive forces to set prices at a level at which buying and selling decisions are synchronized is called the balancing price function. If these competitive prices did not automatically coordinate supply and demand decisions with each other, then some form of administrative control on the part of the government would be needed to eliminate or regulate shortages or surpluses that might otherwise arise.

Changes in supply and demand

Let us consider the impact of changes in supply and demand on the equilibrium price.

Change in demand. Let's assume that demand increases.

How will this affect the price?

Answer:

an increase in demand, ceteris paribus (supply remains constant), gives rise to the effect of increasing prices and the effect of increasing the quantity of the product. Conversely, a decrease in demand causes both the effect of a decrease in price and the effect of a decrease in the quantity of the product. So, there is a direct connection between changes in demand and the resulting changes in both the equilibrium price and the quantity of the product.

Change of offer

Now let's do the opposite procedure and analyze the impact of a change in supply on price, assuming that demand is constant. On the one hand, when supply increases, the new intersection point of supply and demand is located below the equilibrium price. However, the equilibrium quantity of the product increases. On the other hand, when supply decreases, it causes the price of the product to increase. In this case, the price increases and the quantity of the product decreases.

So, an increase in supply gives rise to the effect of lowering prices and the effect of increasing the quantity of the product. An inverse relationship is found between a change in supply and the resulting change in the equilibrium price, but the connection between a change in supply and the resulting change in the quantity of product remains direct.

Special cases may arise when a decrease in demand and a decrease in supply, on the one hand, and an increase in demand and an increase in supply, on the other, completely neutralize each other. In both of these cases, the final effect on the equilibrium price is zero and the price does not change.

Foreign currency market

The concept of supply and demand extends to both the resource market and the foreign exchange market, that is, the market where different national currencies are exchanged for each other. The price, or exchange rate, of a national currency is an unusual price in the sense that it relates all domestic prices to all foreign prices. As a result, changes in the exchange rate can have very important consequences for a country's levels of domestic production and employment. More about this in the chapters on the world economy.

Theory of price elasticity of supply and demand

Price. The impact of price changes on changes in total. Factors influencing price demand. Price elasticity of supply. Time as a factor influencing the price elasticity of Supply.

Price elasticity of demand

Economists measure consumer responsiveness to changes in product prices using the concept of price elasticity.

The essence of the concept of price elasticity of demand is as follows:

1) if small changes in price lead to significant changes in the quantity of products demanded, then the demand for such products is usually called elastic;

2) if a significant change in price leads to only a small change in the quantity of purchases, then in such cases demand is inelastic.

Percentage change in price

Percentage changes are calculated by dividing the change in the quantity of products demanded to the original quantity of products demanded by the change in price to the original price.

If a 3% decrease in price results in only a 1% increase in the quantity demanded, demand is inelastic.

With inelastic demand, the elasticity coefficient will always be less than one.

In this case it will be 1/3.

A borderline situation arises between elastic and inelastic demand when the percentage change in price and the subsequent percentage change in the quantity of demanded products are equal in magnitude. This specific case is called unit elasticity because the elasticity coefficient is exactly equal to one.

For example, when a 1% fall in price causes sales to rise by 1%, perfectly inelastic demand means the extreme case where a change in price does not lead to any change in the quantity demanded. Whatever the price, even if it is 100 times more than the original price, people will still buy alcohol, cigarettes, drugs, insulin, etc.

Impact of price changes on changes in total revenue

The simplest way to test whether demand is elastic or inelastic is to determine what happens to total revenue if the price of the product changes:

1. Elastic demand. If demand is elastic, then a decrease in price will increase total revenue. Conclusion: If demand is elastic, a change in price causes total revenue to change in the opposite direction.

2. Inelastic demand. If demand is inelastic, a decrease in price will decrease total revenue. Conclusion: If demand is inelastic, a change in price causes total revenue to change in the same direction.

3. Unit elasticity. In the case of unit elasticity, an increase or decrease in price will leave total revenue unchanged. The loss of revenue caused by the reduction in unit price will be exactly compensated by the accompanying increase in sales. Conversely, the increase in revenue resulting from unit growth will be exactly offset by the loss in revenue caused by the concomitant reduction in the quantity demanded.

Bread and electricity are recognized as necessities; We won’t last without them. Raising prices for these products will not lead to a significant reduction in their consumption. But if the prices for cognac and emeralds rise, then they don’t have to be bought, and no one will face much inconvenience.

Time factor. The demand for a product is usually more elastic the longer the period of time for making decisions. One reason for this rule is that many consumers are creatures of habit. If the price of a product rises, it takes time to find and try other products until we are convinced that they are acceptable.

If the price of beef increases by 10%, consumers may not immediately reduce their purchases. But after a while they can transfer their sympathies to the bird or fish, for which they now “have a taste.” Another explanation for this rule has to do with the durability of the product. Research shows that "short-term" demand for gasoline is less elastic than "long-term" demand. Why is this happening? Because over the long term, large, gas-guzzling cars wear out and are replaced by smaller, more fuel-efficient cars as gasoline prices rise.

Price elasticity of supply

The concept of price elasticity of demand also applies to supply.

The most important factor influencing the elasticity of supply is the amount of time available to producers to respond to a given change in the price of a product. The longer the time that a producer has to adjust to a given price change, the more the volume of production will change and the correspondingly greater the elasticity of supply. Therefore, the more production changes, the higher the elasticity of supply will be.

Time as a factor influencing price elasticity of supply

It is advisable to begin the analysis of this problem by clarifying the differences between the periods:

1. The shortest market period is a period when producers do not have time to respond to changes in demand and prices.

For example, a small farmer brought his entire harvest for a given season to market on one truck. The supply curve will be completely inelastic; the farmer will sell everything he brought, regardless of high or low price. Why? Because he cannot offer more than what he brought on his truck, even if the price of the product he brought exceeds his expectations. Thus, within a very short period of time, the supply on the part of our farmer is fixed; he can only offer as much as he brought on the truck, no matter how high the price.

2. The short run is the period when the production capacity of individual producers and the entire industry remains unchanged. However, enterprises have enough time to use their capacities more or less intensively. During this period of time, the farmer can use more intensive methods of growing food. The result will be an increase in production in response to the expected increase in demand; such a reaction on the part of production will mean a higher elasticity of supply of products. The price is thus lower than in the example with the shortest market period.

3. The long-term period is a (long) period when firms have time to take all desirable measures to adapt their resources to the requirements of a changed market situation. Individual firms may expand (or reduce) their production capacity; new firms may enter the industry and old firms may leave it. Such changes mean an even more active response from the supply side, i.e. an even more elastic supply curve.

The long-run equilibrium supply curve produces a new price higher than the original price. Why higher? Because an industry with rising production costs leads to rising prices for the resources consumed in it. In other words, expecting that industry expansion will lead to “increasing costs” is quite common and reasonable. In the case of a manufacturing industry, the long-run supply curve would be perfectly elastic, that is, the new price would be equal to the original price.

Thus, the relationship between price and quantity supplied is direct, that is, the supply curve is an upward sloping curve. Therefore, regardless of the degree of elasticity or inelasticity of supply, price and total income always change in the same direction.

State price regulation

In some cases, it may legally establish a price ceiling and floor.

A price ceiling is the maximum price a seller is allowed to charge for their product or service. This allows consumers to purchase some essential goods or services that they would not be able to purchase at equilibrium prices.

An example is rent payments and the rate of interest that is allowed to be collected from debtors.

On a large scale, price ceilings, or general price controls, were used to limit inflationary processes in the economy.

Since the introduction of a price ceiling for a particular product (service), for example at a level, leads to the emergence of a stable shortage of this product, the magnitude of which is determined by the segment, the government has to take upon itself the rationing of consumption of this product in the interests of achieving a more equitable distribution.

Establishing a price ceiling also creates a more serious problem - it prevents price changes, which is absolutely necessary for the efficiency of resource allocation.

For example, control over rents prevents them from increasing and thus signaling the profitability of redistributing resources in favor of housing construction, as well as renewing the old housing stock.

A price floor is a minimum price set by the government that is higher than the equilibrium price. It is usually used in cases where the market system does not provide sufficient income to certain groups of resource suppliers or producers. Minimum legislation and agricultural price supports are two of the most widely known examples of government setting price floors.

Price ceilings and lower price levels deprive the mechanism of free market interaction between supply and demand. Freely set prices automatically ration the product for buyers; regulated prices do not do this. Accordingly, the government has to take upon itself the problem of rationing product consumption caused by the establishment of price ceilings, as well as the problems of purchasing or destroying surpluses arising from the introduction of minimum prices. Government price regulation has contradictory consequences. The expected benefits from the introduction of price ceilings and lower price levels for consumers and producers separately should be compared with the losses arising from the resulting shortages and surpluses.

So, state prices do not allow the equilibrium to carry out the distribution function (rationing). The establishment of price ceilings leads to persistent shortages, and if the government seeks to distribute equitably, it must ration consumption. The establishment of a price floor promotes the production of surplus products; the government must take these surpluses or prevent their occurrence by imposing restrictions on production or stimulating consumer demand.