We are now going to introduce some technical terms that are used in business and economics.
We know that markets consist of buyers and sellers. Buyers represent the demand for a good or service.
Demand is defined as the number of people willing and able to purchase a good or service at different prices.
Sellers represent the supply of a good or service.
Supply is defined as the number of sellers offering goods or services for sale at different prices.
Notice that in each definition we have linked the amount to price. This is because price has an important function in any market.
Copyright: Merlinox MrX
Assume I have a ticket for a gig by your favourite artist. Assume that the concert is sold out and you desperately wanted to go. If I decide I want to sell my ticket then there is now a supply of tickets (albeit only one in this example!). If I offer my ticket for sale I will hope that there are a lot of people who might want it - in other words I am hoping that demand will be high. If demand is high, what do you think I will do with my ticket - who will I sell it to?
If you think I am going to sell it to the person who offers the most money (the highest price) then you are correct!
Let's assume the face value of the ticket is £20. How much will you be willing to pay for it? £25, £30, £40? What is the maximum amount that you would be willing to pay?
In the box below make an offer for the ticket and also state the maximum price you would be willing to pay.
Did you get the ticket? Was the price you offered higher or lower than what I wanted? Was the price you offered lower than your maximum price? If I sold it to you at the price I wanted do you think you got a good deal or not?
In reality we make these judgments all the time when we buy anything.
The suppliers in a clothes shop for example have a range of goods available. You browse through the shop selecting the items you want but all the time you are making judgements about the price on the label, whether you think the price represents good value, whether your could get something better elsewhere, whether you can afford the price being asked.
Sometimes you might really like the item but it is simply out of your price range. In this case you are not, in technical terms, part of the market. Remember, the definition of demand is the number of people both willing and able to buy the good or service.
Image: I would love to have a Ferrari but the price is simply too high for me to afford one. I might want to pay, but am not actually able to pay, therefore I am not part of what is called 'effective demand'. Copyright: David Kirby
