Market Equilibrium Process

Market Equilibrium Process

Kimberly Bellamy

Economics - ECO/561

September 17, 2012

Professor Mark Thompson

Market Equilibrium Process

The market equilibrium process is the method, which manufacturers aim to conserve a balance between supply and demand to reach evenness.Competition of buyers and sellers is the introduction of the market equilibrium process. The absence of buyer seller engagement halts the equilibrium process. When the supply of goods or services becomes meager; buyers begin to bid against one another in relation to the price. This result to the price of the goods or services to increase that generates a decrease in demand at some point. Supply will begin to expand as the outcome of the initial price raise in accordance with the general law of supply. The method persists until the amount demanded is equivalent to the quantity supplied and the price suppliers want to produced runs parallel to the price buyers want to acquire the good at (McConnell et al. 2009).

Law and Determinants of Demand

An extensive majority of goods and services conform what economist refer to as the law of demand. This law states that amount demanded of an item lessens when the price rises and vice versa. Price, in majority cases, is likely to be the essential determinant cause of demand because it is the initial aspect individuals consider when making a decision to purchase an item. An example of a market equilibrium commodity would be gasoline prices. There is a high-demand for gasoline needed because it is used daily with transportation, cooking, warming, and cooling homes. The current cost of a barrel of oil is $99.06 compared to $86.61 to the same time last year. This has resulted in an increase in the price of a gallon by about $.20 one year ago in 2011. Driving habits have begun to change as individuals take notice of the rising prices (Hamilton, 2009).

Law and Determinants of Supply

The law of supply occurs when demand is constant resulting to an increase of supply leading to lower prices, whereas decrease in supply leads to increased pricing. The determinants of supply rely on the cost of production, technology, number of sellers, and the expectation of future prices. Because the supply of gasoline is scarcer than in previous years, the price continues to surge. The marketplace pressures of supply and demand are the main determinants of fuel prices. A disruption in supply or growth of demand brings upward tension on pricing (Calabria, 2011).

Efficient Market Theories, Surplus, and Shortage

The efficient markets theory, known as EMT,