April 11, 2013
The Market Equilibrating Process
Market equilibrium is a situation in which the supply of an item is exactly equal to its demand. Price remains stable in this situation because there is neither surplus nor shortage in the market ("Market," n.d). A real-world experience of this process along with the following components, the law of demand and determinants of demand, the law of supply, surplus, and shortage, is explored in this paper.
A Real-World Experience
Every month a yard service, Seattle Maintenance Solutions, mows, trims, and pulls weeds in my yard. I am charged the same price for these services 40.00 dollars. There is no excess supply or excess demand for this service, one monthly yard service is supplied and one service is demanded. The market for this service is in equilibrium. If business for Seattle Maintenance Solutions declines and the price for mowing the lawn were cut in half to 20.00 dollars to stay competitive with other yard mowing businesses, according to the law of supply, I would increase my demand for the service. My yard would be mowed twice a month instead of once a month due to this market surplus. If every homeowner in my neighborhood noticed how beautiful my yard looked and employed the services of Seattle Maintenance Solutions, the demand of yards to be serviced would be greater than quantity that Seattle Maintenance Solutions would be able to supply. The price of yard service would increase due to the market shortage. Price is the most fundamental determinant of demand. It will determine how much of an item someone will buy. The law of demand states that the quantity of an item will decrease when the price increases (Beggs, 2013). Equilibrium in the market would be reached because the increase in price would be too high for some homeowners, and they no longer could afford the service ("Surplus," 2006).
The laws of supply and demand state that the equilibrium market price and quantity of a good is at the intersection of consumer demand and producer supply. The quantity supplied equals quantity demanded. If the price for a good is below equilibrium, consumers demand more of the good than producers are prepared to supply. This shortage results in the price being raised. Producers will increase the price until it reaches equilibrium. When there is a surplus of goods, the price for a good is above equilibrium, producers are motivated to eliminate the surplus by