What is a Free Market? (Demand)

Where I define a much-maligned term.

A ‘Free Marketis a Market in which the Price of a good or service is determined solely by the Demand & Supply for that good (or service).

But what the hell is a Market?

A Market is a system by which goods and services are exchanged

I.e. Bill Gates wants to sell a computer. Laloo Prasad wants to buy a computer. If these 2 get together and perform an exchange, one can say there is a market for computers. It’s a very small market. But it’s still a market.Whoopy. So, that’s a market.

Now what the hell is Demand?

The demand for a good is the quantity of that good which people are WILLING & ABLE to purchase, at a given price.

Let’s suppose I ask Bill gates – what is the most that he would be willing to pay for a cup of coffee. The absolute most he’d pay – that if even the price were 0.0001 cents, or paise more, he would _not_ buy that cup of coffee. He tells me $10. And let’s suppose he’s the only freak in the world who would buy a cup of coffee for $10. And let’s also, for now assume there is no such thing as sales tax on the coffee, and there are no taxes or subsidies on people who run coffee places, no taxes or subsidies on coffee growers, coffee shippers or any income tax on Bill Gates.

It can then be said that if the price of Coffee is $10, then the demand for Coffee = 1 Cup.

Now let’s suppose the price is lowered to $9. At $9, even I wouldn’t mind buying a cup of Coffee.

Now here is where Economists make their first assumption – they assume people to be ‘Rational’* – what that means, in this case, is that if the MOST Bill Gates is willing to Pay for Coffee is $10, then logically (or rationally, or whatever), he would ALSO be willing to pay for a cup of coffee if it was LESS than $10.

SO – if the cup of coffee is priced at $9, there are two extremely rich idiots willing to buy the coffee, – me and Bill Gates.

So if I were to make a table it would look like this:

Price Quantity
$10 1
$9 2

Now if the price of Coffee was lower by another dollar, me & Bill gates would definitely buy it – but so would other people. It probably won’t even be a sequential increase, but a geometric increase, i.e. if the price drops by $1, the quantity might increase by more than 1 cup. Now if I plot this as a graph, it looks like this:

Demand Curve

Demand Curve

The more expensive the coffee gets, the lower the quantity of coffee ‘Demanded’. The cheaper the coffee gets, the higher the quantity demanded.

So… is that really it as far as that whole fuzzy concept of ‘Demand’ goes? Yes? No, no, seriously. Whenever anybody anywhere uses the term ‘Demand & Supply’, the ‘Demand’ that they are referring to in that sentence, is this very concept.

Now people gunning for Nobel Prizes and PhDs and whatnot will complicate matters by taking about Marginal Utility theory, Indifference Curves and all sorts of other nutty concepts to show you that they really did do some work over the 25 year duration of their PhD. But it doesn’t change anything I’ve just told you.

When somebody talks about Demand (for something), they are simply telling you, how much people are willing to pay for / buy something at whatever the current price of that something is.

Seriously.

(move on to next post – Supply).

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