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In a market economy, supply and demand regulate the price. Using the example of the vegetable trade at a weekly market in Munich, we show how sellers and buyers compare different expectations and what interests they are pursuing.

By: Volker Eklkofer & Simon Demmelhuber

Status: 03/15/2017

Here you will learn, among other things:

  • that in a market economy the quantity of a good produced and the market price depend on supply and demand;
  • how an equilibrium price is formed;
  • Explain the supply and demand behavior of producers and consumers and be able to name influencing factors.

You can also find answers to these questions here:

How do prices for products and services actually arise in markets?
For example, why does a cucumber cost what it costs?
And what is a market anyway?

The market needs competition

The principle is simple: "Prices arise from the interplay of supply and demand and from costs that arise in the production of goods and services," says economist Prof. Wolfgang Gerke. Without consumers even noticing, free markets automatically regulate prices, but also the amount and type of goods and services offered. Free markets are therefore the basis of our economic system.

Sometimes market regulation is necessary

However, some markets are also heavily regulated, and with good reason: for example the market for pharmaceuticals. Only pharmacists are allowed to sell drugs in Germany. (One problem here, however, is the online mail order business of prescription drugs. The formerly applicable price maintenance for prescription media, which also served to protect patients, was canceled by the ECJ at the end of 2016). In Germany, for example, there is currently also (still) fixed prices for books.

By the way: an important basis for functioning markets is money. And that has been around for thousands of years - in the past mainly in the form of coins. "The invention of the coin was an initial spark for the emergence of markets and trade," reports Dr. Bernward Ziegaus from the Archäologische Staatssammlung München in the broadcast and shows the oldest coin found in Germany. It is 2,500 years old.

Supply and demand - the facts:

Economic activities take place in markets. This is where suppliers and buyers meet to sell or buy something. Prices are formed through the interplay of supply and demand. This process is the core element of the market economy.

Demand is the amount of goods that buyers want to purchase at a certain price. The cheaper a product is, the more of it is bought. The more expensive it is, the less of it is bought. This becomes clear in the following example: Let us assume that the price of a cucumber rises to 5 or 6 euros. Then customers would buy fewer cucumbers and maybe get seeds to grow cucumbers in their own gardens. That means: the demand falls as the price rises. How many cucumbers a prospective customer buys at a certain price also depends on how much money he has at his disposal, whether he likes to eat cucumbers and what he wants to do with the cucumbers (if you buy pickles as pickled or mustard cucumbers, for example one larger amounts).

There are various reasons for the demand for a good or a service. For the sake of simplicity, let's assume that demand only depends on price and that the other factors remain the same. Then the cucumber buyer could display the following consumer behavior:

Demand or behavior of a cucumber buyer, if only the price decides:

· If he receives the cucumber free of charge, he takes 4 pieces with him (he does not need more cucumbers because he can no longer eat them).
· If a cucumber costs 2 euros, he buys 3 pieces.
· If a cucumber costs 4 euros, he buys 2 pieces.
· If a cucumber costs 6 euros, he buys 1 piece.
· If a cucumber costs 8 euros, the customer waives the purchase.

This data can be displayed in a curve. A demand curve shows the dependency of the required quantity of a product on the price.

The supply is the amount of goods that manufacturers are willing or able to produce at a certain price. For example, the more profit a vegetable farmer can make with one cucumber, the more cucumbers he will produce. That means: the offered quantity of a good grows as the price rises. The amount provided by the producer is also influenced by so-called input prices (e.g. costs for fertilizer and harvest workers). If the input prices rise, the manufacturer will produce fewer goods if the price remains the same. Technological progress (e.g. harvesting machines) can have a positive effect on the supply: Since production costs fall, the farmer can bring a larger quantity of cucumbers onto the market at the same price.

The law of the offer - behavior of the seller:

· If he does not receive any money for his cucumbers, he does not offer any.
· If he receives 2 euros per cucumber, he offers one.
· If he receives 4 euros per cucumber, he offers two.
· If he receives 6 euros per cucumber, he offers three.
· If he receives 8 euros per cucumber, he offers four.

The law of supply is thus: the higher the selling price, the more cucumbers the seller brings on the market, as the cucumber trade becomes more and more profitable for him.

This data can also be displayed in a curve. A supply curve shows the dependence of the supply quantity on the price.

Now that we have only looked at a single buyer and a single seller, the bulk of the remaining buyers and suppliers are now included in the game of the market. The reason: no single actor can influence the price, the interaction of all determines the price. All demand curves add up to the market demand curve, all supply curves add up to the market supply curve. If the curves intersect, we get the equilibrium price.

If the market price were higher than the equilibrium price, more cucumbers would be offered than demanded - and the competition between the sellers would already begin. They would try to get their pickles to customers through discounts. Prices would continue to fall until supply and demand are in harmony again.

If the market price were below the equilibrium price, fewer cucumbers would be produced and the demand for cucumbers would increase. Cucumber lovers would compete for the cucumbers available, driving prices up until the market price is back in equilibrium.

A market equilibrium is only possible in the ideal case, in a "perfect market", under the following conditions:

1. There are no monopoly and oligopoly structures (e.g. oil, gas, water), but rather several providers that compete with each other.
2. Price agreements between providers do not take place.
3. Buyers and sellers know the market very well and have a complete overview of the market; Customers inform themselves and refrain from customary purchases.
4. Market decisions are made for purely factual reasons, spontaneous purchases and the like. remain under.
5. The goods must be completely identical so that the prices can be compared.

That means: In reality there are only "imperfect markets" that do not correspond to ideal economic ideas.

The content is suitable for use from the 7th grade.

Curriculum payments (Bavaria)

Middle school

Work and economy
7th grade
7.3 Schoolchildren work and manage for a market The schoolchildren should acquire the basic knowledge of market economy and business administration in an action and experience-oriented way by acting as providers, producers and sellers of goods and services.
7.3.1 Supply and Demand

secondary school

economic and legal
8th grade
8.1 The market as a meeting point for supply and demand
- Supplier and customer behavior, functional relationship between supply, demand and price
- role of competition

  • What is a market?
  • Using the given data, create a diagram with a demand curve, a diagram with a supply curve and a diagram with the equilibrium price!
  • Add the following lines: If supply and demand are in balance, one speaks of ……………….! If the supply is greater than the demand, …… ... ……. the price. If the demand is greater than the supply, …… .....… ..the price.
  • Use the example of buying and selling cucumbers to explain how the demand or supply curve can shift!
  • What is meant by an "invisible hand of the market"?