Economists rely on the supply-demand curve to identify or calculate the equilibrium price. Mankiw argues that the existing relationship between the two aspects helps markets to remain stable and support the process of price determination. The market is characterized by numerous factors that tend to have significant impacts on both supply and demand. These forces help investors and customers to make informed decisions and pursue their aims diligently.
The significance of market forces is that a proper understanding of these attributes can guide more businesspeople to make accurate predictions about the possible behaviors expected in a specific market. There are five possible causes or components behind the mechanisms of market forces and their effect on supply and demand.
The first market force capable of disorienting the supply-demand curve is the issue of price fluctuation. Opuni argues that the increase in a product’s value would discourage more customers from purchasing it. This trend would mean that the overall level of demand for such a good would reduce significantly.
The vice versa is true since a reduced price for various commodities tries a sudden upward shift in demand. The second category of market factors influencing this curve is that of credit and income. When an economy faces job cuts or recession, more people will receive fewer financial resources. Governmental policies of financial aid can help to stabilize demand for goods and support businesses.
Marketers rely on this situation to lower prices in an effort to encourage more people to purchase the intended items. Based on the presented data from the 2010 Census, it is evident that the poverty rate rose from 12.5 percent in 2007 to 15.1 percent in 2010. Such an increase could be linked to reduced income levels, thereby shifting demand for elastic products downwards.
The third force in the market capable of disorienting the price equilibrium arising from demand and supply is the presence of competition. Rivalry in any industry emerges when a new player or product emerges that is capable of fulfilling the needs of more customers.
The inclusion of an additional service or good in a specific market could trigger price wars. In most cases, marketers of the existing product would tend to lower its value in an effort to continue making profits. In advanced scenarios, producers might be forced to reduce the overall level of supply as a response to the recorded demand in the market.
The fourth powerful factor capable of influencing supply and demand is the emergence of a specific trend. For example, with increasing levels of commercial advertising, some consumers will be keen to identify and purchase some of the promoted items.
When the presented campaign succeeds and the product is capable of delivering the much-needed quality, more people will acquire it. Consequently, the level of demand would change significantly and compel more companies to supply additional goods.
Finally, seasons are critical market forces that impact the demand and overall supply of a number of products. For example, the Christmas period is associated with an increase in a wide range of products due to consumer behaviors. Marketers rely on the concept of seasonality to identify specific services and goods that could be in higher demand during festive periods. The ultimate aim is to maximize the level of sales and subsequent profits.