StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

Market Equilibration - Research Paper Example

Cite this document
Summary
Economics generally studies how the society strives to allocate its scarce resources in the most efficient way(s) possible to alleviate any form of human suffering. Through Adam Smith’s theory of the invisible hand, free markets, aided by the forces of demand and supply…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER93% of users find it useful
Market Equilibration
Read Text Preview

Extract of sample "Market Equilibration"

The Market Equilibrating Process in a Free Market Details: al Affiliation: The Market Equilibrating Process in a Free MarketEconomics generally studies how the society strives to allocate its scarce resources in the most efficient way(s) possible to alleviate any form of human suffering. Through Adam Smith’s theory of the invisible hand, free markets, aided by the forces of demand and supply functions in the best interest of all in the society (Sunstein, 1999, p. 6). Individuals in pursuit of own self-interests generates unintended demand that compel another bunch of individuals to react (supply the needs of the other side) with the expectation of being able to receive a (quantifiable/measurable) compensation package that leaves both sides better off.

The point that balances the compensation packages for the benefit of both the demand and supply sides typically refers to a state of equilibrium. It is important to note from the outset that equilibrium is just but a pedagogical device (Boyes & Melvin, 2012, p. 57). The reality is that markets [free markets inclusive] are always in the process of working, and that there are no static equilibrium prices and/or quantities as suggested in theory. Nonetheless, the process always tends towards an equilibrium point.

The market equilibrating process in a free market works exclusively through the forces of demand and supply. Thus, no group of buyers or sellers holds a domineering influence in setting market prices. Accordingly, all consumers are considered rational decision makers with parallel objectives of maximizing their utility, and that demand accurately measures the quantity that buyers would be willing and able to acquire at a unit price (Gandolfi, Gandolfi & Barash, 2002, p. 17). Simply put, demand is majorly influenced by lower pricing; such that, any increase in the price of a commodity in a free market structure lowers the number of people (buyers) willing to buy the product; an inverse relationship that sums up the law of demand.

Apart from commodity prices, other factors such as income, prices of substitute goods as well as tastes and preferences among others that occasionally come into play not only to alter quantity demanded, but shift the demand curve altogether (Boyes & Melvin, 2012, p. 59). A sample shift in demand curve due to a decrease in income is shown in the diagram below.While buyers/consumers try to maximize their utility by pulling prices downwards, sellers (businesses/firms) endeavor to maximize profit through an upwards price pulling effect.

In other words, suppliers strive to make available goods and services in amounts that best help them get the highest attainable profit, thus the law of supply. Just like the demand curve, the quantity offered for sale in the market depends not only on the price of the product/service in question but on numerous factors; price only determines the changes in supply along the supply curve. Changes in the level of technical know-how, a price change of an input or of alternative inputs, changes in prices of substitute products, expectations among other factors occasionally destabilizes the quantities made available to consumers in the market via shifts in the supply curve (Boyes & Melvin, 2012, p. 60). A sample shift of a supply curve to the right is shown in the diagram below.

The demand side downwards price-pulling effect and the supply side upwards-price pulling effect serve to balance the competing interests into a state of compromise, otherwise known as Market Equilibrium (Gandolfi, Gandolfi & Barash, 2002, p. 24). Any deviation from the point of balance [3p, 70q] “self corrects” in a free market structure to eliminate undue advantage on either of the two sides. Given the constant profit motive, a price above the equilibrium position automatically sends signals for more production.

Basically, there will be more market entry, which eventually floods the market with supplies in question, thus the surplus Qs-Q*. Price P2 surpasses the consumers’ willingness to pay, thus demand shrinks to Qd from the original Q*, prompting a fierce competition that results into price reduction to the initial equilibrium position (Boyes & Melvin, 2012, p. 58). Similarly, any price below the market equilibrium [say P1] demotivates production, thus the shrinking supplies to Qs, which obviously reflects in the market as a shortage [Q*-Qs].

At P1, demand exceeds the supplies prompting price increases to its original position (Boyes & Melvin, 2012, p. 58). ReferencesBoyes, W. J. & Melvin, M. (2012). Microeconomics. Mason OH: Cengage Learning. Gandolfi, A., Gandolfi, A. & Barash, D. (2002). Economics as an Evolutionary Science: From Utility to Fitness. New Brunswick: Transaction Publishers. Sunstein, C. R. (1999). Free Markets and Social Justice. New York: Oxford University Press.

Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“Market Equilibration Research Paper Example | Topics and Well Written Essays - 500 words”, n.d.)
Market Equilibration Research Paper Example | Topics and Well Written Essays - 500 words. Retrieved from https://studentshare.org/macro-microeconomics/1621237-market-equilibration
(Market Equilibration Research Paper Example | Topics and Well Written Essays - 500 Words)
Market Equilibration Research Paper Example | Topics and Well Written Essays - 500 Words. https://studentshare.org/macro-microeconomics/1621237-market-equilibration.
“Market Equilibration Research Paper Example | Topics and Well Written Essays - 500 Words”, n.d. https://studentshare.org/macro-microeconomics/1621237-market-equilibration.
  • Cited: 0 times

CHECK THESE SAMPLES OF Market Equilibration

Child Development Concept

Psychology Customer Inserts His/Her Name Customer Inserts Grade Course Customer Inserts 14th March, 2013 Introduction In the process of growing up, people undergo different stages and these stages are common in everybody.... As a result, a lot of scientists have studied child development and summarized these stages through use of different theories....
6 Pages (1500 words) Term Paper

Exchange Rate Crisis

A domestic monetary agency parallel to the currency board might expand liquidity, as measured by the domestic money stock, through open market operations.... Disturbances to Equilibrium Real Exchange Rates Third, the currency to which the board pegs may come under pressure from output market disturbances in the reserve-currency country....
11 Pages (2750 words) Essay

Gold Standard and The Foriegn Exchange

The exchange of merchandise was eased and new exchange mediums were… When the governments adopted paper currency, majority of the countries had paper-money standard except for China where the silver standard ruled most of the time and the United States where the gold standard prevailed meaning the value of the paper was Kemmerer (1944) defines gold standard as “a monetary system where the unit of value, in terms of which prices, wages, and debts are customarily expressed and paid, consists of the value of a fixed quantity of gold in a large international market which is substantially free....
4 Pages (1000 words) Essay

Market equilibrium

hellip; If we consider the demand of homes in the market, income is a determinant since it lowers or increases demand for the commodity.... High population will increase market Equilibrium Law of demand and the determinants of demand The law of demand s that if the prices of commodities are high, then buyers of commodities will inquire lower quantities compared to the case when the prices are low.... If we consider the demand of homes in the market, income is a determinant since it lowers or increases demand for the commodity....
2 Pages (500 words) Research Paper

Market Equilibrating Process Paper

Other variables such as Apples branding, the Apple ecosystem, innovation in technology and design have exerted their respective roles in the The market Equilibrating Process: the iPhone Experience For this particular activity, I chose to talk about Apples iPhone product.... hings are changing, however, because of the increasingly competitive market and the increasingly sophisticated requirements of the consumers.... 0) Recently, a research by the firm IDC placed the market share of Android to about 68 percent whereas Apple claims only 16....
2 Pages (500 words) Essay

Market Equilibration Process Paper

This creates excess of demand over supply which causes the price to rise to a new equilibrium level P2 and also the quantity falls to a new equilibrium level Q2 It refers to the quantity of a commodity per unit time which consumers are willing and able to buy in the market at a given price other things held constant.... It can be defined as the quantity of goods and services per unit of time which the suppliers are willing and able to produce to the market for sale at a given price other things held constant....
3 Pages (750 words) Research Paper

Central Problem with Mainstream Economics

It is highly associated with neoclassical economics in contrast with the heterodox approach.... Thus, it focuses on the various ways of determining the prices, determining the prices of various… This income distribution is mediated through maximization of utility which is often hypothesized by individuals who are income constrained and of profits There are various assumptions that are related to mainstream economics....
8 Pages (2000 words) Essay

The Factors Responsible for the Economic Downturn in the UK

hellip; There are prominent barriers to entry into the market, due to the high degree of influence that each seller portrays.... ldquo;The use of barriers to entry” – This discovery is associated with the fact that there has been a rising concentration in the UK grocery market over the years.... With the UK grocery market being a profitable sector, it is expected that there must be a high tendency among people to enter the market as sellers....
7 Pages (1750 words) Assignment
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us