What is Market and Supply and Demand
We live in a world which is often called a market economy, what does it mean and what economic principles does it imply?
What is the market?
A market is a real or fictitious place of exchange. On the market meet economic agents who offer a good service and others who come to get it. This creates a network of exchanges. These exchanges can be done in a physical place, with direct contacts or in a fictitious way, the contact then not being direct such as financial markets or internet sales. These exchange relationships are created around the product offered, its nature, its availability, its quality but also and above all, according to its price.
Different types of markets
The major economic markets are linked to the types of products offered; there are 5 of them:
• The goods and services market
consumers (households, businesses, etc.) buy goods and services from producers (businesses, governments, etc.).
• The labor market
here, households sell their labor power to companies, administrations, etc. for a salary.
• The financial market
on this market, economic agents exchange securities such as stocks, for example. The share price is called their price.
• The money market
it is a market frequented for the most part by banks where fiat money (notes) is exchanged for securities.
• The foreign exchange market
on this market, foreign currency (foreign exchange) is exchanged for national currency. Banks, businesses, and households are involved in this market.
Supply and demand
Supply represents the number of goods or services (within the framework of the goods and services market) that economic agents are ready to sell on the market. The supply of goods and services comes mainly from businesses but also from administrations or associations.
Conversely, on the market for goods and services, demand represents the number of goods and services that economic agents are ready to buy. We, therefore, find households (final consumption) but also businesses (which make intermediate consumption or investments) or administrations (operating expenses, investments).
Supply and demand are aggregated functions that represent the addition of the behaviors of all the economic agents intervening in the markets.
Attention, on the job market, the supply of work comes from households, and the demand for work comes from companies, administration (it should not be confused with supply and demand of jobs). The work is exchanged at a certain price i.e., salary. The supply and demand are respectively the numbers of goods or services that the actors in a market are willing to sell or buy based on price.
- The TV offer in a country corresponds to the number of units for sale in all stores combined
- The demand for this same country corresponds to the number of TVs that customers want to buy.
A bit of history on supply and demand
If the theory of supply and demand covers an old intuition for Roger Guesnerie, its formalization began in 1838 when Augustin Cournot introduced the demand curve. Later, Alfred Marshall introduced a supply curve representing supply according to prices. In the framework of the theory of partial equilibrium between supply and demand, at the intersection of these two curves are the price and the demand for equilibrium.
Supply, demand, and price
Supply is largely linked to the production of companies, which have a constraint expressed by their production cost, their turnover increases with the price of the goods or services sold. So if the price goes up, the turnover increases and the profit too. The offer is increasing according to the price.
The economic agents which form the demand, like households, in particular, have needed to be satisfied, but they have a constraint represented by their budget. So when the price of goods or services increases, they can no longer get as much as before, they must limit the quantities requested. The demand is, therefore, decreasing according to the price.
The interest of the supply and demand model
The interest of the supply and demand model is that it allows, outside the sophisticated formalism of the general equilibrium, to intuitively grasp the mechanisms at work in the decision to allocate resources in the economy of the market.
The offer of a good is the quantity of a product offered for sale by sellers for a given price. Unlike demand, that is the quantity of a certain product requested by buyers for a given price. The price of a good is considered to be a quantity dependent (among other things) on supply and demand.
From this principle, we derive a mathematical law, the law of supply and demand. This law is often generalized by a law of the markets, a name used to designate the law which governs a market, with or without the intervention of the state.
The law of supply and demand
The law of supply and demand often refers to partial equilibrium in a market. In markets where partial equilibrium applies, the following effects are seen:
- when the price goes up
- The supply tends to increase: producers are encouraged to offer more goods, new producers are encouraged to settle, holders of this good are encouraged to sell them.
- Demand tends to fall: the higher the prices, the less willing buyers are to buy.
- When the price drops, supply tends to decrease: Producers have less incentive to produce.
- Demand tends to increase: the lower the price, the more willing buyers are to buy.
It is presented differently, given a market where for each price, we combine supply (the quantity that all sellers want to sell) and demand (the quantity that all buyers want to buy). There is an intersection point that maximizes the number of exchanges. A price a little above will leave sellers willing to sell without a buyer. A price a little below will leave buyers willing to buy without a seller. In both cases, the number of exchanges will also be smaller than at the point of intersection. There will be buyers and sellers who will not be satisfied anyway, but it will be because of the price but not because they have not found anyone opposite.
A supply and demand curve corresponds to a given number of suppliers and applicants. An increase (or decrease) in the number of offerers or applicants causes a shift to the right or to the left, and therefore a change in the balance.
Having found that this principle could be applied to a good number of markets, economists have long sought what the conditions which a market had to fulfill in order for the point of equilibrium to be reached were.
Market research: sector, supply, demand, and environment analysis
In order to obtain satisfactory and relevant results when carrying out your market research, it is preferable to segment your approach around these four axes i.e., the market, demand, supply, and the environment.
Advice for your market research
To do your market research, you will have the choice between two solutions, do it yourself, which will take time, or outsource it to professionals, which will cost money. In the latter case, you must still participate in its development. Indeed, market research provides interesting knowledge that must be used to set up the project.
Some professionals now offer high-performance services for studying a market by allowing you to configure it i.e., number of responses, geographic area, etc
Before embarking on the collection of information, you must clearly define the market on which you will position yourself. There are types of products or services offered type of market (individuals, businesses, schools, administrations, etc.), a geographic area targeted, etc. The well-defined market is an essential starting point for conducting a relevant study.
It is necessary to adopt a structured and organized approach to conduct market research. To do this, you can segment your analysis around these four axes, the market, demand, supply, and the environment, and then you must ask the right questions. The objective is clear, analyze the market potential, and validate the commercial feasibility of your project.
First step: studying the market and its evolution
First of all, it is necessary to be informed about the market in a global way. The objective is to improve your knowledge in this area, market volume (turnover, quantities sold, etc.), main players, trends, likely developments. Here is an example of a list of questions to ask yourself to study the market and its likely evolution:
- What is the volume of the market? Particularly in terms of turnover, customers, quantity sold.
- How is the market doing now? What are its development prospects for the coming years? A market can be growing, declining, or stagnating.
- What are the current market trends?
- What products or services are available on the market?
- Who are your direct or indirect competitors? What do they offer? What are the common points and the differences between what is offered by the competition and your range of products/services? These elements will then be analyzed in detail in the study of the offer.
- Who are the suppliers of the competitors? What are their terms of sale? Who are my potential suppliers, and what conditions can they offer me?
The questions that you deal with during this step should allow you to develop your knowledge of the state of the market and the players that evolve there.
Second step: studying the demand and Supply
By studying the demand, the objective is to learn about the trade of the market and to judge if there is a potential to exploit. Here is an example of a list of questions to ask when studying the request:
- How many customers are there in this market? How is this number changing (increase, decrease, stagnation)?
- Who are these customers exactly? Where are they located?
- What is the rate of consumption by customers? How do they behave? It is necessary to seek details on the times, places, and habits of consumption, what motivates them to consume, and their level of satisfaction.
- What are the criteria for choosing consumers? What is their budget? What are the important points to trigger a purchase? The important criteria can be the price offered, the level of product quality, or the distribution method.
Ideally, it is necessary to study the evolution over time of the answers to each of these questions and the probable evolutions for the years to come.
Third step: studying the offer
The analysis of the offer consists of studying in detail what your competitors already offer on the market. Here is an example of a list of questions to ask yourself to study the offer:
- Who are the competitors on the market? Which companies have the largest market shares? How big are the main competitors? Where are they located, and how do they choose their locations? Since when have they been present, and what is their financial health? What are the latest market entrants?
- What products and services do they offer? What are the characteristics of these products and services (price, quality, marketing method, distribution method, after-sales service, etc.)?
- How do they communicate with consumers?
- How do competitors differentiate from each other?
- By what criteria do some competitors succeed better than others?
- Have any competitors experienced failures? Have they closed their business? If yes, what are the reasons?
The in-depth study of the offer proposed by the competitors can allow you to identify possibilities to be exploited to prepare your future offer and have competitive advantages. You will also have a better knowledge of what works, the essential criteria for success, and also what did not work (thanks to the study of chess).
Fourth step: the study of the environment and legislation
The study of the environment consists of analyzing the factors likely to influence the market, such as the applicable regulations, technological developments, or any other element that may impact it.
Here is an example of a list of questions to ask when studying the environment:
- What innovations are impacting the market? What about possible future technological developments? How often do innovations impact the market?
- What is the regulatory framework that governs the market? Are there specific laws for this market? What are the trends in the evolution of legislation?
- Are there professional groups or other actors who act or influence the market?
- Are there barriers to entry?
Author: Vicki Lezama