Essay Market Equilibrium

Assignment: Market Equilibrium Individual Paper

By PJ Lamé

ECO 561 – Chandler Campus

University of Phoenix

Facilitator: Dr. Bob Sherman

Week Two – December 19, 2012

Laws and Determinants of Supply and Demand What the Law of Demand states is that given, if everything else stays equal, as price of a product falls, the quantity demanded rises. And since there is a negative or inverse relationship between price and quantity demanded, as price rises, the demand falls, in turn. We must keep in mind that a change in demand is different than a change in quantity demanded. “A change in demand is a shift in the demand curve to the right (increase in demand) or to the left (a decrease in demand). It occurs because the consumer’s state of mind about purchasing the product has been altered in response to a change in one or more of the determinants of demand. Recall that “demand” is a schedule or a curve; therefore, a “change in demand” means a change in the schedule and a shift of the curve.” (McConnel, Brue, & Flynn, 2009, pp. 51-52). In comparison, a change in quantity demanded is a shift from one price-quantity combination to another on a fixed demand schedule or demand curve (McConnel, Brue, & Flynn, 2009). The increase or decrease in the price of a product is what causes such change. The Law of Supply states that there is a rather positive or direct relationship between price and quantity supplied, meaning that, as price rises, the quantities supplied also rises. The reverse is also true in the case of the law of supply in where, as price then falls, so does the quantity supplied. “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. A change in any one or more of these determinants of supply, or supply shifters, will move the supply curve for a product either right or left. A shift to the right, as from S 1 to S 2 in Figure 3.5, signifies an increase in supply: Producers supply larger quantities of the product at each possible price. A shift to the left, as from S 1 to S 3 , indicates a decrease in supply: Producers offer less output at each price” (McConnel, Brue, & Flynn, 2009, pp. 52-53). [pic]

Market Equilibrium

When discussing economics, an economic equilibrium is a state of the global economy where the economic forces are balanced, and in the absence of external influences the economic variable will not change. In a standard model, where discussed in textbook, relating to a model of a perfect competition, equilibrium occurs at the point at which quantity demanded and the quantity supplied are equal. Market equilibrium then in such case refers to the condition where a market price is established through competition such that the amount of goods and services sought by buyers is equal to the amount of goods and services produces by sellers. The price in this case is often referred to as the competitive price, and it will not change unless demand or supply changes. So, as discussed, we achieve market equilibrium where the supply of a product is exactly equal to the demand, and since there is neither a shortage, nor a surplus in the market, the price tends to remain stable. This is a perfect, textbook-like scenario which hardly ever happens in a real-world economy. The graph below show a market equilibrium where Q depicts the Quantity produced by the manufacturer or seller, and P refers to the Price of the product.

[pic] So, what we have here in the graph at the market equilibrium is that supply is equal to the demand. Now, if price was below the equilibrium at P2, then demand would be greater than the supply. Therefore, there would be a shortage (Q2 –Q1). This will force firms to increase prices and supply more. As price

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