Market Equilibration Process

Market Equilibration Process

Michelle Sibley

ECO 561

July 19, 2011

Tulin Koray

Market Equilibration Process

Supply and demand is the backbone of the market economy. The operations of a smooth flowing market rely heavily on the interaction between suppliers and demanders. Market equilibrium exists when the quantity of a product is equal to its demand (Business Dictionary, 2011). The ability of maintaining market equilibrium is essential for the daily activities of any business manager. In this paper the subject to explain is the market equilibrating process and will include components of law of demand, law of supply, efficient markets theory, and surplus and shortage.

Market equilibrium is important to the balancing of the economy. A market economy brings together buyers and sellers. Demand refers to a buyer’s or seller’s intentions with respect to the purchase of a product or service (McConnell, Brue, & Flynn, 2009). According to the law of demand as price falls, the demanded quantity rises and as price rises, the demanded quantity falls (McConnell, Brue, & Flynn, 2009). The law of demand shows a negative or inverse relationship between price and demanded quantity.

Several detrminants affect the law of demand. The first determinant affecting the law of demand is the prices of a product’s substitutes. This example is true with items such as shoes and cars. The next determinant affecting the law of demand is relative price. People often buy more of a product at a lower price than a high price. Other determinants affecting the law of demand are a consumer’s preference, number of buyers in the market, and consumer expectations.

As price rises, the supplied quantity rises and as price falls, the supplied quantity falls (McConnell, Brue, & Flynn, 2009). This relationship is known as the law of supply. Price is often an obstacle for many consumers. The higher the price the less the consumer tends to buy. Because supply...