Market Equilibration, Essay Example

Introduction

Market equilibration is a constant force in economics, and – according to Tieben (2009)- should be treated as an empirical trend. The idea of equilibration confirms that the market price is determined by the interaction between demand and supply. Equilibration is when there is a balance between market supply and the demand for the product or service. This way, an equilibrium price can be determined, based on measuring the demand. Every new entrants on the market would cause a shift in the equilibrium price, as well as the income of customers can increase it alike. These are only two examples of inward and outward shifts. However, both supplies and demands can shift, as the market is a result of a constant movement of forces.

The below two charts would explain the inward and outward shifts of demand and supply.

Law of demand

The law of demand says that if every other variable remains the same, the demand for quality rises when the price decreases, and this is true vice versa. Therefore, if the market price goes down, more customers will appear on the market, while if it increases, less will buy. (Aryasri, 2007)

Law of Supply

The law of supply concludes that if all other variables remain the same, the quantity of supply will be related to the price of the commodity. (Deepashree, 2008) Therefore, when the price increases, the supply increases and vice versa.

Efficient markets theory

The efficient markets theory assumes that the price of a commodity would depend on all the relevant information available on its value. Therefore, the behavior of the market would depend on their perception of the product or service, and this would determine the price and demand.

Surplus and shortages

The market has a role in eradicating surplus (extra production) and shortages (less production than the market demand). In detail, surplus is excess supply compared to the demand of the market, while shortage is when the supply falls behind the market demand. (Bumas, 1999)

References

Tieben, B. (2009) The concept of equilibrium in different economic traditions. A historical investigation. Rozenberg Publishers, 2009

Aryasri, A. (2007) Managerial Economics And Financial Analysis. Tata McGraw-Hill Education

Deepashree, A. (2008) General Economicas for CA Common Proficiency Test, Tata McGraw-Hill Education

Bumas, L. (1999) Intermediate Microeconomics: Neoclassical and Factually-Oriented Models. M.E. Sharpe, 1999