Among the categories of market economy, demand, supply and market equilibrium are perhaps the most important and most used. These categories characterize many performance indicators of various forms and types of enterprises.
In the simplest sense, demand is an indicator that characterizes the quantity of goods that consumers are able to purchase for any particular period of time. It is customary to distinguish two types of demand in modern science.
Individual demand characterizes the demand of a particular, individual individual.
Industry demand is an indicator of the aggregate demand for a given product of all market participants. The maximum possible amount of goods that individuals can purchase at a given price and for some certain time is characterized by an indicator of the volume of demand.
In practice, demand, supply and market equilibrium are measured using various methods. For example, the demand scale shows the relationship between the quantity of a product and its price. Actually, the demand law is built on this dependence, which consists in the fact that the demand decreases with increasing prices for this product. Therefore, the demand function is the inverse of the price function. If the price is designated as P, and demand as D, then the relationship between them will be reflected by the formula F (D) = 1 / f (P). However, economic theory also provides for some exceptions to this law, which characterizes demand, supply and market equilibrium. These exceptions apply to some groups of goods that, while on the market, are not affected by these patterns. We are talking about the Griffen group, which includes all essential goods and Veblen's goods, which include luxury goods.
A proposal characterizes the physical quantity of goods that firms and enterprises are ready to present for sale on the market, its values are determined in the same way as it is done in relation to demand. It turns out this dependence: F (S) = f (P), where S is the value of the supply of goods.
Market equilibrium reflects a situation in the market in which demand is parametrically equal to supply and at the same time an equilibrium price is formed.
In addition to the categories of demand, supply and market equilibrium, a very important indicator of the market condition is the concept of elasticity, which is the magnitude of the change in one market parameter when another changes. There are various types of elasticity: by demand, by income, by price, arc elasticity, cross and others. They, together with indicators of the temporary capabilities of enterprises, determine the types of market equilibrium.
When demand increases and enterprises do not have enough time to increase supply, an instant equilibrium arises. It is formed only when the price exceeds the original.
Short-term equilibrium occurs when, with increasing demand, manufacturers begin to increase supply by increasing production volumes.
Long-term is achieved by a total increase in production by all enterprises in this industry. At the same time, the elasticity of supply increases, and the price becomes “normal market”.
As can be seen even from such a superficial analysis, there are quite definite advantages and disadvantages of the market mechanism. Its strengths include economic democracy, efficient distribution and flexibility.
The list of objective disadvantages include:
- inability to use natural resources efficiently;
- promotes the adoption of only those management decisions that are effective at the short stage of business activity;
- does not stimulate the reproduction of public goods;
- develops unevenly.
A favorable background for business development is determined by the ratio of advantages and disadvantages, which helps to choose the right strategy for economic development.