Market Equilibration - Research Paper Example

The Market Equilibrating Process in a Free Market Details: al Affiliation: The Market Equilibrating Process in a Free MarketEconomics generally studies how the society strives to allocate its scarce resources in the most efficient way(s) possible to alleviate any form of human suffering. Through Adam Smith’s theory of the invisible hand, free markets, aided by the forces of demand and supply functions in the best interest of all in the society (Sunstein, 1999, p. 6). Individuals in pursuit of own self-interests generates unintended demand that compel another bunch of individuals to react (supply the needs of the other side) with the expectation of being able to receive a (quantifiable/measurable) compensation package that leaves both sides better off.

The point that balances the compensation packages for the benefit of both the demand and supply sides typically refers to a state of equilibrium. It is important to note from the outset that equilibrium is just but a pedagogical device (Boyes & Melvin, 2012, p. 57). The reality is that markets [free markets inclusive] are always in the process of working, and that there are no static equilibrium prices and/or quantities as suggested in theory. Nonetheless, the process always tends towards an equilibrium point.

The market equilibrating process in a free market works exclusively through the forces of demand and supply. Thus, no group of buyers or sellers holds a domineering influence in setting market prices. Accordingly, all consumers are considered rational decision makers with parallel objectives of maximizing their utility, and that demand accurately measures the quantity that buyers would be willing and able to acquire at a unit price (Gandolfi, Gandolfi & Barash, 2002, p. 17). Simply put, demand is majorly influenced by lower pricing; such that, any increase in the price of a commodity in a free market structure lowers the number of people (buyers) willing to buy the product; an inverse relationship that sums up the law of demand.

Apart from commodity prices, other factors such as income, prices of substitute goods as well as tastes and preferences among others that occasionally come into play not only to alter quantity demanded, but shift the demand curve altogether (Boyes & Melvin, 2012, p. 59). A sample shift in demand curve due to a decrease in income is shown in the diagram below.While buyers/consumers try to maximize their utility by pulling prices downwards, sellers (businesses/firms) endeavor to maximize profit through an upwards price pulling effect.

In other words, suppliers strive to make available goods and services in amounts that best help them get the highest attainable profit, thus the law of supply. Just like the demand curve, the quantity offered for sale in the market depends not only on the price of the product/service in question but on numerous factors; price only determines the changes in supply along the supply curve. Changes in the level of technical know-how, a price change of an input or of alternative inputs, changes in prices of substitute products, expectations among other factors occasionally destabilizes the quantities made available to consumers in the market via shifts in the supply curve (Boyes & Melvin, 2012, p. 60). A sample shift of a supply curve to the right is shown in the diagram below.

The demand side downwards price-pulling effect and the supply side upwards-price pulling effect serve to balance the competing interests into a state of compromise, otherwise known as Market Equilibrium (Gandolfi, Gandolfi & Barash, 2002, p. 24). Any deviation from the point of balance [3p, 70q] “self corrects” in a free market structure to eliminate undue advantage on either of the two sides. Given the constant profit motive, a price above the equilibrium position automatically sends signals for more production.

Basically, there will be more market entry, which eventually floods the market with supplies in question, thus the surplus Qs-Q*. Price P2 surpasses the consumers’ willingness to pay, thus demand shrinks to Qd from the original Q*, prompting a fierce competition that results into price reduction to the initial equilibrium position (Boyes & Melvin, 2012, p. 58). Similarly, any price below the market equilibrium [say P1] demotivates production, thus the shrinking supplies to Qs, which obviously reflects in the market as a shortage [Q*-Qs].

At P1, demand exceeds the supplies prompting price increases to its original position (Boyes & Melvin, 2012, p. 58). ReferencesBoyes, W. J. & Melvin, M. (2012). Microeconomics. Mason OH: Cengage Learning. Gandolfi, A., Gandolfi, A. & Barash, D. (2002). Economics as an Evolutionary Science: From Utility to Fitness. New Brunswick: Transaction Publishers. Sunstein, C. R. (1999). Free Markets and Social Justice. New York: Oxford University Press.