“Estimating price of product in the market by Demand and Supply curve”
Now before starting this blog, I want to ask a simple question, do you know where the commodities(like oranges, fruits, vegetable) you buy daily come from ? Yes, it is simple, from markets. Although we know that oranges are not grown in the market . They are originated from the farmer’s land and then passed through the various supply chains and come to the market for you. So let’s start this article by What is Market ? and later we will see how to find out price using demand and supply curve.
What is a market??
So the market is a place where buyer and seller come ogether to exchange goods and services. The key to the market definition is the concept of voluntary exchange of goods where buyer and seller willing make a transaction.
So the concept of voluntary exchange simply means that both sides of exchange ie ; the buyer and seller must be satisfied with the deal. For eg:- if you buy a dozen banana for $4 that means the seller is happy to sell the banana for $4 and you as a buyer become satisfied with the price of a banana and may feel this price more worth. This is how every market in the world works. Also an example from the labour market, where the builder feels satisfied in paying $20 per hour to labour and so does the labour feel satisfied by the amount he received from the builder.
Competitive market turns out to be pretty great about allocating or distributing our scare resources to the most efficient way. For example:- if in market mango are selling at a good price and all the farmers see this as an opportunity to earn good profit. And all started to produce mangoes in bulk, mangoes will be in huge amount in the market as compared to the demand. So the price of the mangoes will fall automatically and farmers will stop producing more mangoes. Now again the quantity demanded will increase due to the lowering of the price of mango.
This is the simple concept of supply and demand. A farmer can never be able to earn a good profit until he produces a good quality of mangoes. Thus in a free market where the market is transparent and all are free to choose, it is hard for any business to take advantage of the consumer, unlike china where markets are governed by government authorities.
Demand and Supply Curve
Now in the market, the question arises who decide the price of the product. Where prices of the product come from and how the prices fluctuate in the market. Let’s see.
To study first we have to take a look at the demand curve for mangoes.
Here if we observe, that whenever the price drops the number of mangoes demanded increase and whenever price rises then the demand for mangoes decreases. It’s quite obvious also because you yourself buy a commodity more if it is in the sale. So now let’s see the situation from a seller perspective.
So here, it is pretty clear that if the price of the mangoes increases then the supply increases. If the price of the mangoes decreases then the supply also decreases. It is also very obvious because a farmer is always willing to produce that fruit which pays him more.
Supply curve work this way.
But if we see the market with the perspective of a buyer then he will always want a lower price for the product while seller always wants a higher price for his products. In this situation, the price of the product is decided by drawing supply and demand curve together.
But here is a problem, if the supplier produces the number of mangoes more than required, then there will be a surplus of mangoes and hence the price of the mango will come down.
So here’s how the price is decided, if the price of mango goes up by $15 then the demand of the mangoes will be of only 100 dozens. But the suppliers will produce the mangoes in surplus Say about 1000 dozens. So this situation leads toward surplus and not toward our answer.
Here if the supplier sets the price according to the consumer demand suppose $5, then there will be a shortage of mangoes as the price decreases the quantity demanded increases.
So here is only one price where both supplier and buyer are satisfied this point is known as equilibrium price. Here Quantity demanded = Price of the product demanded, and here price is known as equilibrium price.
Here price of a dozen of mango is been found out by this method, but here comes one more question. The prices of mangoes never remain the same throughout the year. The reason is because of other factors like season favourable for mangoes or substitute product got cheaper etc. The supply and demand curve shifts upwards or downwards
depending upon the situation. To read about the factors affecting demand curve read this blog:- https://myknowledgeclub.com/what-is-demand-in-economics/
And as the curves shift, the equilibrium point will also shift, which leads to change in the prices of products in the market. That’s it, only these things help us to find out the price of the product.
There can be only 4 reasons for the change in the price of the product.
- Supply can be increased.
- Supply can be decreased.
- Demand can be increased.
- Demand can be decreased.