The magic of the market
A market is a place where goods are regularly traded in a central square. The weekly market with agricultural products or the flea market are probably the best-known examples. From an economic point of view, however, the term "market" refers to the regulated merging of supply and demand for goods and services. The basic principle of the market can be regarded as exchange or exchange of services. By using money, the exchange of goods for goods can be separated from each other in time. Now goods are exchanged for money and money for goods. When supply and demand for a good or service coincide, this is called market equilibrium. But what does it mean for the market if this equilibrium no longer exists? And what does it mean in terms of the economy as a whole? To do this, we need to take a closer look at the so-called economy. It shows us certain tendencies in the development of the economy as a whole.
Supply and demand
In other words, supply and demand meet in a market. On the one hand, there are suppliers or producers who want to sell their goods at the highest possible profit. On the other hand, there is the buyer or the consumer who wants to buy the goods at the lowest possible price. For these conflicting points of view and interests, a compromise must be found between supplier and demander.
If supply exceeds demand, market prices fall. This indicates that the good is less scarce than before. The suppliers are reacting to this: they are reducing production, because there is now less money to be made from this good. Conversely, the demanders: at a lower price, more people will want to buy this good. From an economic point of view, this is rational, because if a good becomes less scarce, its production should be reduced and its consumption can be increased. The opposite is true when a commodity becomes scarce. Then the market price rises, demand decreases and suppliers increase production, often even attracting new, additional suppliers from other markets.
Competition
Those who can deliver what is in short supply earn money on the market. On the other hand, those who produce "past the market" lose market share and thus income. Consumers are turning towards the providers with the better offer and away from their competitors. They have the freedom of choice and can decide according to their wishes and needs.
However, this freedom can only develop if competition functions within the social market economy. Without competition, profit is decoupled from market performance. This happens, for example, in a cartel (merger of companies). Here, the price is dictated by the companies. In the absence of effective competition, it is not the market that decides the distribution of income, but the power of individual companies.
In this way, scarcity can be combated by functioning markets without any central planning. This is because market prices contain all the important signals for producers and consumers. In the social market economy, the state may therefore only intervene in the regulatory cycle of supply and demand in exceptional cases.
In other words, providers align their offerings with consumer demand. But what impact does this have on the price? Test your knowledge with this exercise.
Sometimes the market mechanisms are not always easy to understand. Why a product has exactly this price, or what impact a falling demand has on supply, is not always immediately apparent. In order to represent the market mechanisms in a market, the so-called price-quantity diagram is often used. With the help of the diagram, you can quickly and clearly see how supply and demand as well as the price of a product are related to each other. You can find out exactly how the price-quantity chart works here.
Who actually decides how much a product ultimately costs? The answer is simple: supply and demand. If it's that simple, then the following scenarios shouldn't be a problem for you. Find out what happens to the price when supply or demand changes.
