Market Equilibration Process

Market Equilibration Process

Bernd Kremer

ECO/561

Genevieve Turanos

June 17, 2013

Market Equilibration Process

The market equilibrium is defined as “A situation in which the supply of an item is exactly equal to its demand. Since there is neither surplus nor shortage in the market, price tends to remain stable in this situation” (Business Dictionary). This paper will describe the market equilibration process focused on US housing market during the last years.

The US Housing Market

The price of houses in the United States reached its peak in 2006. In 2012 the prices were back to extrapolated averages as you can see in the attached graph.

Figure 1 (Parsons)

In the timeframe from 1970 until 1999 the market equilibrium is a state “in which the supply of an item is exactly equal to its demand” (Business Dictionary). The price did remain quite stable. Determinants of supply and demand influence the function of supply and demand and consequently the equilibrium which is defined as the point where supply and demand are meeting as illustrated below.

Figure 2 US housing market 1970 until 1999

Figure 2 US housing market 1970 until 1999

Do

Po

So

Qo

Price

Quantity

Do

Po

So

Qo

Price

Quantity

“The basic determinants of supply are (1) resource prices, (2) technology, (3) taxes and subsidies, (4) prices of other goods, (5) producer expectations, and (6) the number of sellers in the market” (McConnell, Brue, & Flynn, 2009, p. 52). “The basic determinants of demand are (1) consumers’ tastes (preferences), (2) the number of buyers in the market, (3) consumers’ incomes, (4) the prices of related goods, and (5) consumer expectations” (McConnell, Brue, & Flynn, 2009).

Between 2001 and 2006 the demand for houses in the United States increased significantly. All determinants of demand were affected and at the demand (D) function moved to the right since the supply (S) could not increase at the same paste as the demand was. For this...