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The law of supply and demand prescribes that prices change when either the supply of goods and services or the demand for them changes. Ceteris paribus, when supply increases and demand remains constant or reduces, prices go down. If supply remains unchanged or reduces, while demand increases, prices go up. These phenomena are referred to as the market forces of demand and supply.

However market forces can only operate optimally when there is significant price elasticity of demand for a particular product or service. Market forces operate very weakly where the demand for a product is price inelastic. The demand or a product or service is said to be price elastic if say a 10% change in price would lead to say 10% or higher change in demand. Demand for a product or service is inelastic if the change in price does not cause a significant change in demand. Inelasticity often relates to very essential products with no close substitutes.

Petrol and power (electric) are very essential products without close substitutes and having price inelasticity of demand. It is noteworthy that the much referred telecommunication, has higher elasticity than the former. Thus market forces would have very weak contribution to the prices and demand for petrol and power. This is the reason why the prices of these two products, locally  produced or imported, can only be determined by the cost of production, including raw materials and not the so called market forces. Thus increasing the number of players and consequently supply, would have very weak impact on their demand and price.

What really are these market forces? Does it exclude government intervention? How “free” is the market?

According to Wall Street Mojo, market forces refer to the forces influencing the price and quantity of goods in a market. In economics, it is also known as market dynamics, describing how they eventually affect a nation’s economy and growth. They are limitless and can impact foreign markets and international trade transactions. Such forces vary from country to country based on social, demographic, cultural, economic, technological, political, and legal factors.

The four major market forces are:

–          Supply and demand
–          Government intervention
–          Human emotion and consumer buying behavior
–          Technological advancement

It is therefore a total fallacy and myth, to suggest that market forces exclude government intervention.

So, until we get absolute and affordable substitutes for petrol and power, government intervention must continue to be a part of the market forces that should control their price, to attain the much desired market equilibrium.

Now that subsidy has been removed due to dwindling revenue and lack of capacity and competence to checkmate the inherent corruption and diversion, then government must be ready to acquire the capacity and competence to deploy the necessary infrastructural “palliatives” to cushion the effect of such removal. Cash transfers have other purposes, but definitely not for cushioning the effects of subsidy removal.

NNPC says it has sufficient fuel reserves for at least 32day-supply, yet in absolute negation of the law of demand and supply, petrol cost continue to rise. The reason cannot be overemphasized. The inelasticity would ensure excess supply of petrol does not have significant effect on its price, whereas shortage supply and scarcity, would worsen the price. Therefore, we should not live in fools’ paradise by expecting the cost of petrol to crash with more players in the market. Only a crash in the aggregate cost of production, which that of crude oil is major, can crash the cost of petrol. The effect of market forces, other than government intervention, would be very weak.

Also, if and when gas becomes a perfect alternative to petrol, thereby making the demand for the latter more elastic, we must however not be disappointed, when the same market forces push up the price of gas, which now appears to be lower than that of petrol, plausibly because of its currently lower demand.

Doyin Ola Kasumu FCA.CFC.MBA.MSc.BSc.

Chief Consulting Officer @ Deeno Consulting

Post Author: Deeno


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