Introduction
There is high importance of markets in economics, which is a place where goods and services are exchanged for a particular price. This exchange is based on the demand of consumers and the supply of producers, who then determine a price at which they both agree to make the exchange.
Markets
In economics market is defined as a process through which buyers and sellers come into contact and exchange information, goods and services. Goods could include anything tangible like fruits, clothes, books and so on. Services include the intangible products like financial services, hair salons and so on. Exchanging goods and services for money is known as a transaction and a market is formed by its buyers and sellers who can influence the price. The market allows items to have a value, which is represented by the price allocated to the respective product or service and decided upon by the consumers andor producers. (Sloman, 2003)
There are different types of markets that operate in the UK. Commodity markets are involving sales of goods in the primary sector. When gold is sold in its raw form, this is in the commodity market. The product has passed through few stages of processing and this is why prices are usually low. For example, UK farmers have faced issues with prices of their livestock sales. These prices can be raised if the producers some together and reduce the supply in the market. (n.a, 2002)
Another type of markets is Consumer markets which sell to the end user who intends to directly using the item. The market for blankets and bed sheets is an example. Since there is usually high value addition to the product, the prices are high. In addition, prices are even higher if the product is a luxury item. There is considerable competition in this type of market as producers try to being in new and improved. Fruit markets is the UK are an example of consumer markets representing sales of a need item.
Another type of markets is Industrial markets which sell to other businesses. Stationary sold to businesses is an example. It consists of capital markets as well. Property markets in industrial areas exist in the UK but have faced a downturn in 2009 as the value of properties came down in industrial areas during March 08 March 09. The attractions to the tenants have had to be improved to keep the rents from falling in this market. (NB Real Estate, 2009)
Capital goods market is yet another type of market. This market involves exchange of durable items which are bought by buyers who plan to use the item in further production or another way that furthers his business. The market for tractors used in agriculture is an example. The buyers usually look for good quality at a reasonable cost so their cost if business is reduced and production improved. Industrial machinery market in the UK is an example of capital good market and Jedco product designers is an example of a player in the UK industrial machinery market.
Service markets involve sales of services. Financial advisory services and wedding planners are part of the service marketing industry. Due to the personalized nature of services, the sellers must have strong relationship building skills to be successful. In UK, there is the mortgage market which gives various options among four thousand products to the buyers. This market has a lot of competition and innovation is the key to success. (n.a, n.d)
An emerging market is the Internet market where everything from goods to services is sold to the end user as well as to businesses. The Internet Advertising Bureau is an example for a UK internet service market.
Supply and Demand
Supply and demand are the two important aspects of economics. The term Demand means the amount of goods or services a consumer wants to purchase. Quantity demanded is what the consumers are willing and able to buy at a given price. Demand is one of the components of the market that are used to fix a market price. Supply is the quantity that is available in the market for selling. The amount of products and services that the market has for sale at each of the given prices is the quantity being supplied. (n.a, 2009)
At a particular quantity and price, the supply of goods and services is equivalent to their demand. This is known as a situation of equilibrium. The curve of Demand and Supply cross each other here. This point is considered the most efficient one as the supply equals the demand. Consumers are getting what they want and suppliers are selling however much they can. (Schneck, 2003)
In a competitive environment it is always expected that the economy will arrive at the equilibrium state. However, in two situations disequilibrium may occur Excess demand or excess supply.
Excess supply
This will happen when the prices are set so high that buyers are unwilling to buy the goods at that price this will create an economic inefficiency.
At the price of P1, the quantity that is supplied is greater then the demand. At this price, the producers are willing to supply Quantity Q2, while the consumers are only willing and able to purchase Quantity Q1. Clearly, there is excess supply in the market measured by the difference between Q1 and Q2. This extra supply will remain idle as no one is willing to buy it, and in order to avoid this situation of wastage of resources, the products will cut down their production until it equals a point at which their supply is equal to the consumers demand. This will bring them to the equilibrium point. (n.a, 2009)
Excess Demand
Excess demand is when at a certain price quantity supplied exceeds the quantity demanded. This situation occurs when the price charged for the product is lower than the equilibrium price. At this low price, there will be too many customers who are willing and able to purchase the product. However, the producers are not willing to supply too much quantity at this low price for they might not benefit much from the deal.
As the graph shows, in a situation where the prices are lower than the equilibrium point, there is soaring demand, which the suppliers are unable or unwilling to provide. This leads to an excess demand over the limited available output for sale. As a result, there is a competition between the customers to purchase the products at the price. They will be willing to pay a higher price in face of this competition, pushing the prices up. Eventually, the producers will want to supply as much as they can at the increased prices to benefit and earn more profits. This will happen till the supply of goods equals its demand leading to equilibrium.