The market plays a major role in any economy. In fact, the market forces form the basic foundation on which all discussions, arguments, and theories surrounding economics are built. Indeed, in markets lies the power engine that drives all economies. Therefore, anybody who wants to understand economics must also care to understand the power of markets and how the market forces work. Such understanding is not only limited to those who study economics for academic purposes, but is also important to producers and consumers.
The major forces in the market are the concepts of demand and supply. Demand is referred to as the quantity of goods that the consumers are willing and able to buy from the market at a particular time. Supply on the other hand is the quantity of goods that the producers are willing and able to take to the market at a given time. The point of intersection of these two opposing forces is called the equilibrium point. An increase or decrease in the supply or demand affects the equilibrium point in different ways. This is what majorly characterizes working market forces.
The working of the demand and supply forces goes hand in hand with pricing of goods. For instance when the supply goes up, there will more of a good in the market than the quantity that the consumers are willing to buy. Therefore, the suppliers lower the prices of the good in order to entice the consumers to buy more of it. The goods, therefore, become cheaper. On the other hand, when supply goes down, the price will increase. Concerning demand, when the demand is higher, consumers start competing for the goods. The person with the highest amount of money is the one who buys the good. This makes prices in the market shoot up.
However, there are certain circumstances when an economist does rely only on market forces to make an economic decision. This is because there are certain goods which do not comply with the principles of the demand and supply curve. For example, when the price for housing rises, it is expected that the buyers will reduce the price so it can reach the equilibrium. However, such increases in the prices of housing sometimes continue to rise due to various reasons. First, the buyers, who want to resell the houses, later may speculate on a further rise in price and buy more houses to sell them later, when the prices are higher. Secondly, the people who buy the house for themselves may also speculate on a further increase in the housing prices, hence rushing to buy houses before the prices get unbearable. This situation limits the ability of demand and supply forces to determine the prices of goods in the market.
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Another case where the market forces may not work is the Giffen goods. These are luxurious goods whose consumers believe that the higher the price, the better the quality of the goods. Sometimes, it is not the quality of the goods that matters as such, but the status that comes with it. Consequently, the consumers buy more of such goods as the prices increase. This habit defies the laws of the market forces. However, most goods comply with the laws of market forces. Therefore, the market still remains the most powerful component of economics. It is the most valuable and trusted source of information to both producers and consumers. It also answers their questions on what economic steps to take and how to take them.
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