Market Equilibration Process Paper - Essay Example

Supply and Demand Market equilibrium is one of the most important in economics and the understanding of real world working experiences. Market equilibrium is essential or business managers if their operations are to succeed in the current technological and competitive environment (Sloman, 2006). The market equilibrium process consists of many factors, and the four most important ones are the law of supply and its determinants, the law of demand and its determinants, efficient markets theory and surplus and shortage (Dobson and Palfreman, 2009).

The law of demand is a basic economic concept that dictates that when prices are low, and all other factors are kept constant consumers will always demand higher quantities of products (Krugman and Wells, 2004). In my opinion, the law of demand exists because of the purchasing power of individuals, which changes when the prices of goods and services change. The main determinants of the law of demand include the income levels of the individuals, the level of incomes and the price of related goods (Krugman and Wells, 2004).

Other determinants include input costs that determine the prices of the goods and the taxes and regulatory prices that determine the costs of the product. Conversely, the law of supply states that, when all other factors are held constant, and the price of a commodity is lowered, the supply for the commodity will generally also be lowered (Krugman and Wells, 2004). This means that the supply of a commodity is lowered when the price of the commodity is lowered, since he supplier would not be willing to supply at a low price.

This is because higher prices increase the incentives for increasing costs, and the law of increasing costs also helps in sustaining the prices. The determinants of supply include the prices of inputs and taxes and subsidies that affect the costs of production. One of the commonest economic concepts is that if scarcity, where it is accepted that resources are valuable because of their scarcity. In this case, scarcity means that decisions should be made about how resources are allocated, which is solved by using the economic system (Dobson and Palfreman, 2009).

The efficiency markets theory is a way in which the allocation of resources is done in the most economical way; technology uses the cheapest production method available for any output rate, which ensures that resources are not wasted (Sloman, 2006). The other use of the efficiency market theory is the consideration for the economy, where the production sector produces the highest possible value of output as determined by the consumer. Surplus and shortage is another economic concept that is part of the equilibrium process, where the shifts in the supply and demand curves cause different levels of surplus and shortage (Dobon and Palfreman, 2009).

Shifts in the demand or supply curves will always cause the equilibrium price and quantity to change, as illustrated in the following graphs. Shift in Supply Curve Shift in Demand Curve References Dobson, S., and Palfreman, S. (2009). Introduction to Economics. Oxford: OUP. Krugman, P., and Wells, R. (2004). Microeconomics. New York: Worth Publishers. Sloman, J. (2006). Essentials of Economics. Bolton: Prentice Hall.