Types of Supply And Demand
There are six main categories of supply and demand, which are organized based on the underlying economic principles that drive their behavior.
Main Categories
- Monopsony — a market structure in which a single buyer dominates the market, characterized by an imbalance of power between the buyer and sellers, as seen in the case of Walmart, which is a large retailer that has significant influence over its suppliers.
- Monopoly — a market structure in which a single seller dominates the market, characterized by a lack of competition and high barriers to entry, as exemplified by the De Beers company, which has historically controlled a significant portion of the diamond market.
- Oligopoly — a market structure in which a small number of sellers dominate the market, characterized by interdependent decision-making and a high degree of competition, as seen in the case of the major airlines in the United States, such as American Airlines, Delta Air Lines, and United Airlines.
- Law of Supply and Demand — the fundamental economic principle that describes the relationship between the price of a good or service and the quantity that consumers are willing to buy and producers are willing to supply, as illustrated by the market for gasoline, where an increase in price leads to a decrease in demand and an increase in supply.
- Derived Demand — a type of demand that is dependent on the demand for another good or service, characterized by a high degree of interdependence between the two markets, as seen in the case of the demand for truck tires, which is dependent on the demand for trucks.
- Joint Supply and Demand — a type of market in which two or more goods or services are produced and consumed together, characterized by a high degree of interdependence between the two markets, as exemplified by the market for chicken and eggs, where an increase in the demand for chicken leads to an increase in the demand for eggs.
Comparison Table
| Category | Cost Structure | Market Power | Speed of Adjustment |
|---|---|---|---|
| Monopsony | Low costs for the buyer, high costs for sellers | High market power for the buyer | Slow adjustment to changes in market conditions |
| Monopoly | High costs for consumers, low costs for the monopolist | High market power for the monopolist | Slow adjustment to changes in market conditions |
| Oligopoly | Moderate costs for consumers, moderate costs for producers | Moderate market power for producers | Rapid adjustment to changes in market conditions |
| Law of Supply and Demand | No inherent cost structure | No inherent market power | Rapid adjustment to changes in market conditions |
| Derived Demand | Dependent on the cost structure of the related market | Dependent on the market power of the related market | Rapid adjustment to changes in the related market |
| Joint Supply and Demand | Interdependent cost structures | Interdependent market power | Rapid adjustment to changes in market conditions |
How They Relate
The categories of supply and demand are interconnected and can influence each other in complex ways. For example, a monopoly can lead to a derived demand for complementary goods or services, as in the case of a company that produces a unique software product and also offers training and support services. Similarly, an oligopoly can lead to a joint supply and demand situation, as in the case of the major airlines, which offer a range of services, including flights, hotels, and car rentals. Additionally, the law of supply and demand can be influenced by monopsony or monopoly power, as in the case of a market where a single buyer or seller has significant influence over the price of a good or service. Ricardo's comparative advantage model (1817) also highlights the importance of understanding the relationships between different markets and industries, as countries can gain from trade by specializing in the production of goods for which they have a comparative advantage. Boeing produces ~800 aircraft annually (Boeing annual report), which is an example of a company that operates in a market with a high degree of oligopoly power.