Market Equilibrium

Market Equilibrium

Trent M. Fallis

ECO/561

3/2/2015

Seyed Baladi

Market Equilibrium

The term equilibrium is defined as the state in which economic forces such as supply and demand are balanced resulting in a stable price. If a market is at equilibrium, the price will not change unless an external factor changes the supply or demand, which results in a disruption of the equilibrium (Education Portal, 2015).

Efficient Markets Theory

The efficient markets theory is a proposition that the prices within a market fully reflect all available information at any point in time (Fama, 1970). Therefore, taking this theory into account it can be argued that market equilibriums and equilibrium prices incorporate all the available information instantaneously (Lo, 2007).

Market Surplus

If a market is not at equilibrium, market forces tend to move it towards equilibrium (Education Portal, 2015).. For example, if the market price is above the equilibrium value, there is a surplus, which means there is more supply than demand (Education Portal, 2015). When this occurs the sellers will reduce the price of their goods in the attempt to reduce inventories. The hope is that these lower prices will entices more people to buy the product, thus reducing the market supply and increasing the demand for the product. Furthermore, when a surplus exists producers will slow down their production since the sellers will stop ordering new inventory resulting in demand increasing and supply decreasing until the market price equals the equilibrium price (Education Portal, 2015). In this situation, excess supply has exerted downward pressure on the price of the product (EconPort, 2006).

A surplus can result from many factors. For instance, a manufacturer may anticipate a higher demand for a product than actual exists which results in the production of more than it can sell during that time period. Also, financial instability in the market can result in consumers not buying new...