A market economy is an economic system that relies on a free market to regulate the exchange of money, services, and goods. According to Opuni (2017), the prices in a market economy are determined by demand and supply, while the governmental interference is minimal. Demand refers to consumers’ willingness and ability to purchase products or services for a certain price, while supply is used to describe the amount of material and non-material goods available at the market. The two concepts are often co-dependent since consumers cannot purchase something that is not available to them, while suppliers find it economically disadvantageous to make products or offer services that are not wanted by their potential clients. Hence, the laws of demand and supply help to understand the basic functioning principles of a market economy.
In economics, demand and supply are often expressed as equations and thus can be plotted as graphs to provide visual information. A demand equation shows the number of goods or services consumers are willing to acquire for various prices: As a rule, the higher is the price, the fewer people would like to buy a product. A supply equation demonstrates the number of goods or services suppliers are ready to offer for a range of prices. The direction of a supply curve is commonly the opposite of the direction of a demand curve because it is more profitable for producers to offer their goods at higher prices. According to the data (Keat, Young, & Erfle, 2013, p. 59), the supply is QS = -1000 + 10P, while the demand is QD = 3000 – 10P. Based on this information, it can be predicted that demand will equal zero at the price of $300, whereas the supply will cease to exist at the price of $100. Once again, it is clear that consumers wish to pay less, and supplier wants to earn more.
When supply equals demand, economic equilibrium is achieved. G. (2017) defines equilibrium as a situation where no party is incentivized to make any changes. On graphs, the balance of supply and demand is marked by the intersection of the supply and demand curves. In the case of the computer support company, the equilibrium is achieved at the price of $200, resulting in 1000 businesses receiving the service. If the company decides to increase its prices, it risks losing its clients. At the same time, if the company chooses to reduce its prices, it might not be able to cater to all its clients due to their increase in number. Thus, equilibrium is a useful economic concept that helps to avoid surplus or shortage.
A market economy means that supply and demand are rarely stable. Supply is largely shaped by the prices of raw materials and the cost of production, or in the case of non-material goods, by the company’s expenditures on salaries, equipment, and other things necessary for the provision of services. Demand, on the other hand, is affected by such factors, as the general economic situation, the quality of products and services, or the availability of substitutes. When demand increases to QD = 3500 – 10P (Keat et al., 2013, p. 59), supply is also likely to increase. The new equilibrium price is $225, and the new equilibrium quantity is 1250 businesses. Furthermore, when the supply curve changes to QS = -500 + 10P due to new suppliers entering the market (Keat et al., 2013, p. 59), the balance is altered again. This time the equilibrium is achieved at the price of $200 and the quantity of 1500. Overall, the market economy facilitates dynamic changes in demand and supply.
The concepts of supply and demand help to explain the basic processes in a market economy. Due to constant changes in a free market, equilibrium price and quantity do not remain the same for long periods. Therefore, the knowledge of economic laws and principles is essential for anyone who wants to establish a successful business in a market economy.
References
G., M. (2017). Introduction into microeconomics. Munich, Germany: GRIN Verlag.
Keat, P. G., Young, P. K. Y., & Erfle, S. E. (2013). Managerial economics: Economic tools for today’s decision-makers (7th ed.). Boston, MA: Pearson.
Opuni, F. (2017). Fundamentals of microeconomics. Key essentials of demand and supply analysis. Munich, Germany: GRIN Verlag.