TSR Wiki > Study Help > Subjects and Revision > Revision Notes > Economics > Resource Allocation in the Market
A market usually consists of buyers and sellers. They do not have to physically meet; buying and selling shares in the stock market are an example. It normally is done over phone and Internet. However there must be both buyers and sellers/ The absence of either one of these two will prevent a market forming.
Supply and Demand
The main benefactors of supply and demand are two forces or actions in a market. Buyers demand things and sellers supply things. Demand is the amount of a good or service that is bought at a particular price over a particular time period. Supply often differs from demand in that most supply decisions have to be made ahead of the market transaction. Suppliers often have to give a educated guess what the demand will be. They might get it wrong leading to too much or too little. Supply is defined as the quantity of a good or a service that a seller is willing to provide at a particular price over a particular time period.
Demand Function
A demand function is a relationship between two or more variables. What determines the quantity demanded of a good over a particular time period? The price is a big factor on how much the quantity is demanded over a long period of time. Household income is another demand function. The more money a household has the more demand in goods. This goes for every country. When income changes, demand for a good usually changes the same way i.e. it is positively sloped. Income increases demand increases and visa versa. Such goods have name for this; it is called normal goods. When income falls and demand goes up these goods are called inferior goods.
Ceteris Paribus - other things equal!
A important general study method of economics is known as ceteris paribus It is not possible to see the change in variable if the quantity demanded keeps on changing. Economists try to reduce the effects of more than one variable changing by getting their information correctly. But sometimes it doesn't work out to the best of our knowledge.
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