The market for goods and services is where all kinds of goods such as clothing, food, household appliances, etc. are bought and sold. and services such as health, educational, aesthetic services, etc.
To begin with, we are going to clarify that the study and behavior of the market for goods and services corresponds to the field of macroeconomics. Macroeconomics fundamentally studies the behavior and interrelation of three major markets. The market for goods and services, the money market and the labor market.
How the market for goods and services operates
Certainly, in the analysis of microeconomics to determine how the equilibrium price and quantity are formed, it is observed how the forces of supply and demand interact. Microeconomics studies the market for each good and service in isolation.
While in the macroeconomic analysis the behavior of the market for goods and services is analyzed through the use of aggregate variables.
1. The aggregate offer
Undoubtedly, the aggregate supply represents the total amount of goods and services that companies produce and sell in the market of a specific country. These goods and services are offered at a price level and for a specified period of time.
2. Aggregate demand
For its part, aggregate demand represents the totality of goods and services that are demanded in a country, in a defined period of time and at a certain price level.
3. Price level
Now, the general price level is represented by the CPI (consumer price index). The CPI represents the general average price level of goods and services that are bought and sold within a country.
The CPI also represents the average variation in the prices of the set of goods and services that are bought and sold in the market.
4. Production level
Naturally, the level of production is represented by gross domestic product (GDP). GDP is a macroeconomic aggregate that measures the totality of goods and services that are produced in a country during a given period.
The market for goods and services can be represented graphically as follows:
To understand the graph we are going to indicate what each element represents:
- CPI: It is the average price of the goods and services that are offered and demanded in the market. In general it indicates the average variation of prices within the economy.
- GDP: Represents the total amount of goods and services that are produced in the economy of a country. Always in a given period of time and at a certain price level.
- D: It is the aggregate demand and represents the intention to purchase goods and services in the market of the economy of that country.
- S: It is the aggregate supply and represents all the goods and services that companies produce and sell in the market.
- Pe and Qe: It is the equilibrium point and represents the price and the quantity where the purchase and sale intentions coincide in the market for goods or services, so that nothing is over or missing.
Of course, the graphical representation is very important for the analysis of the market of goods and services. Since it serves to observe how the price level and the level of production behave within the economy.
Production is represented on the horizontal axis, that is, GDP. Similarly, on the vertical axis, the CPI represents the general price level. Both are approximations of the level of productive economic activity and the price level, respectively.
Changes in the market for goods and services
Of course, in this market there are modifications and changes, for example, the number of goods and services produced and offered in the economy can increase. This causes a shift in aggregate supply to the right from S to S1, causing the equilibrium price to change from Pe to Pe1, and the equilibrium quantity to change from Qe to Qe1.
This would imply that the general price level would decrease and that the amount of aggregate demand would increase, because the population would have more purchasing power.
Also on the side of aggregate demand there are modifications and changes. If aggregate demand increases, it produces a demand shift to the right from D to D1. This causes the equilibrium point to change, causing the price to go from Pe to Pe1. The amount for its part moves from Qe to Qe1.
In this case the general price level would increase and the amount of aggregate supply would also increase.
Finally, we can say that the analysis of the behavior of the market for goods and services is very important for any economy. Since this market reflects the general level of price and the general level of production of a country. If a country’s economy maintains an adequate growth rate, the level of production grows and the general price level remains stable.
Law of supply and demand