INTRODUCTION TO MARKET SYSTEM:

A market system may be defined as a systematic process which enables the market players to make a deal. The market system not only comprises of the price mechanism but is made up of various other factors like qualification, reputation, credentials etc. The market system relies upon the demand and supply of the commodities. Price plays a major role in limiting the demand and the supply in a market system. The driving force in a market system is the self interest followed by the competition (Lindblom,nd).

 

LAW OF DEMAND

In a market system, demand is the key. If there is no demand there is no point of production. The law of demand is the backbone of the entire market system. In a market system, it is seen that the demand of the product is greater when the price is less. Hence, the price and demand have a negative relationship with each other. When there is an increase in prices the demand reduces and when the prices are lower the people tend to buy the commodity to a greater extend. This is actually the law of demand. The law of demand states that when the price of a good rises, the amount demanded falls, and when the price falls, the amount demanded rises (econlib.org2007 [online]). Apart from the price another factor that greatly affects the demand is the per capita income. When the per capita income is higher, the demand of normal goods increases while the demand of inferior goods decreases (Nagle, Thomas T, 1987).

 

Law of Supply

According to the law of supply, the higher prices of a particular commodity increase its supply in the market. The reason behind the fact is that the higher prices of the commodity fetch greater profits to the seller. To take up the maximum advantage, it is important on the part of the seller that he reacts quickly to the change in price and demand in the market system. Also, it is important that he finds out whether the change is temporary or permanent (investopedia2007 [online]).

 

SUPPLY, DEMAND AND PRICE

The relationship between supply, demand and price can be easily understood by the following example. Suppose a particular manufacturer sets the price of his item at $10 as per the market research carried out by him. He supplies 1000 items in the market. If 1000 items are demanded by 1500 people, the price of the commodity increases. An increase in price will thereby increase the supply of items in the market system.

Similarly if 1000 items are produced and the demand is only for 500, the price will not increase due to excessive supply in the market. On the contrary, the price of left over 500 items will reduce.

 

MARKET EQUILIBRIUM

A market equilibrium is established when the demand is equal to the supply in the market system. In this state the producers sell the goods at the marked price and the buyers get the desired quantity of goods that is required by them (Stigler, George J. 1966). Market disequilibrium occurs when the price of a particular commodity is set unreasonably high or when the prices are set very low which increases the demand of the commodity excessively in the market system (investopedia2007 [online]).

 

References:

The Market System by Charles, E. Lindblom

The Strategy and Tactics of Pricing. By Nagle, Thomas T.

The Theory of Price, 3d ed. by Stigler, George J.

Econlib. Available:
www.econlib.org. Last accessed 25 October 2007.

Investopedia. (2007). Market System. Available:
www.investopedia.com. Last accessed 25 October 2007.