Economics

Market Equilibrating Process

The market equilibrium is “the state of equilibrium that exists when the opposing market forces of demand and supply exactly offset each other and there is no inherent tendency for change. Once achieved, market equilibrium persists unless or until it is disrupted by an outside force. Market equilibrium is indicated by equilibrium price and equilibrium quantity” (Glossary, 2008, p. 1.). The equilibrium price will not change unless the supply or demand changes.

The quantity and equilibrium price increases if the demand increases, and they will decrease if the demand decreases. In addition, the equilibrium quantity increases when the supply increases but the equilibrium price decreases. When the supply decreases the equilibrium quantity decrease and the equilibrium price increases.

An example of the market equilibrium process is the housing market. A few years ago anyone could buy a home. Lenders were offering unbelievable options for individuals to purchase a home regardless of credit. The banks benefitted because loans were offered at an adjustable rate and homeowners were led to believe they could refinance after one-year with a good payment history to receive a lower interest rate and payment. In addition, the homeowner incurred higher closing fees, which benefitted the brokers. Therefore, individuals bought homes they could not afford because they were improved for higher amount homes and the realtors benefitted from selling the more expensive home to receive higher commissions. As long as the price of homes stayed below the market equilibrium then, the home values would maintain rising. The problem began when the demand for homes started decreasing, which left a larger supply of homes on the market, the prices of homes started decreasing, (McConnell, Brue, & Flynn, 2009).

When the demand amount and supply have a difference, then price changes occur, in which decreases the difference that will balance the market. If the...