Page 57 - 6727

Economic Theory

Why would economists study a thing that rarely exists in the world? The
answer is that although few, if any, markets are perfectly competitive,
many markets are nearly perfectly competitive. Many gas stations do have
nearby competitors – often right across the street – that prevent them from

charging more than the market price. There are some gas stations that
don’t have such nearby competitors – think of an isolated station on a

country road – but such examples are the exception. If sellers have nearly
identical goods and most market participants face lots of competition, then
the perfectly competitive model is a good approximation of how actual
markets work. On the other hand, there are some markets in which large

market participants – like Microsoft in the software market – can single-
handedly control market prices.
In a market-based economy, consumers are the demanders of goods

and services, and producers are the suppliers of goods and services.
Consumers can only demand goods and services if the goods and services
demanded are somehow useful to them, and if they have money to pay for
the goods and services they want. Producers will only be willing to make

goods and services to sell on the market if they can do so without losing
money. The goal of producers is to make money by supplying goods and
services to the marketplace. If consumers are willing and able to purchase

goods and services, and producers are willing and able to place goods on
the market, consumers and producers come together to establish an
equilibrium, market-clearing price and quantity for each available good or
service. In the following sections, these concepts are examined in detail

from the perspectives of the consumer and the producer.

2. Meaning of Demand. Demand Schedule and Demand Curve.
Law of Demand. Determinants of Demand
In Economics, demand means desire to have a commodity backed by

enough money to pay for the good demanded. Thus, in economics we are
concerned only with demand, which is effectively backed up by an
adequate supply of purchasing power, i.e., with effective demand. Thus, if

a person desires to buy a car, he should have enough money to buy that;
then only demand becomes effective. It should also be mentioned here that
demand is not complete unless the consumer has willingness to buy a good
or service. A person has the desire and enough money but at a particular

point of time, he may not have willingness to buy the good due to sudden
change in his taste or preference. For example, when a person goes to a

57