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Market Equilibration - Research Paper Example

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Economics 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…
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Market Equilibration
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Market Equilibration

Download file to see previous pages... 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 ...Download file to see next pagesRead More
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