Topic 4. Supply and demand in market mechanism

Demand. The law of demand.

Supply. The law of supply.

Interrelation between supply and demand. Market equilibrium.

Elasticity of demand.

Elasticity of supply. Variables of supply elasticity

Elasticity and buyer response.

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The market system is an interrelated set of markets for goods, services and inputs. A market is defined as the interaction of all potential buyers and sellers of a good or class of goods that are close substitutes.

The economic analysis that is used to analyze the overall equilibrium that results from the interrelationships of all markets is called a "general equilibrium" approach.

Partial equilibrium is the analysis of the equilibrium conditions in a single market (or a select subset of markets in a market system). In principles of economics, most models deal with partial equilibrium.

In a partial equilibrium model, usually the process of a single market is considered. The behavior of potential buyers is represented by a market demand function. Supply represents the behavioral pattern of the producers/sellers.

A demand function that represents the behavior of buyers can be constructed for an individual or a group of buyers in a market. The market demand function is the horizontal summation of the individuals' demand functions.

The nature of the "demand function" depends on the nature of the good considered and the relationship being modeled. In most cases the demand relationship is based on an inverse or negative relationship between the price and quantity of a good purchased.