Market Equilibrium Process

Market Equilibrating Process

ECO/561

Market Equilibrating Process

In this week’s reading, the market equilibrating process has everything to do with supply and demand. The market is at equilibrium when the quantity demanded equals the quantity supplied. The equilibrium price and equilibrium quantity price fall at the intersection of the supply and demand curve of a product. If the demand increases, then the equilibrium price and quantity will increase. If demand decreases, then the equilibrium price and quantity will decrease. An increase in supply will increase the equilibrium quantity but reduce the equilibrium price. A decrease in supply results in an increase in equilibrium price but a reduction in the equilibrium quantity. This concept is easier to grasp when looking at the shifts graphically side by side below.

[pic]

(McConnell, Brue & Flynn, 2009, p. 129)

I researched this process and found a clearer way of describing it as follows: “Discrepancies between amounts demanded and supplied lead to changes in price which reduce the discrepancy and, plausibly, equilibrate the market” (Leijonhufbud, 2009, p. 174). When the price is raised higher than the equilibrium price then a surplus occurs. The opposite happens when the price is lowered below equilibrium, a shortage occurs. Surplus’s drive prices down to encourage consumer to purchase the product while shortages drive prices back up to equilibrium. The market equilibrating process happens when there is competition between buyers and sellers. “At the equilibrium price and quantity in competitive markets, marginal benefit equals marginal cost, maximum willingness to pay equals minimum acceptable price, and the total of consumer surplus and producer surplus is maximized” (McConnell, Brue & Flynn, 2009, p. 129).

My mother is a realtor so she deals with the market equilibrating process every time she has to negotiate an offer. The real estate market is a great example of market equilibrium...