Equilibrium Price and Quantity in a Product Market - Example

Equilibrium Price and Quantity in a Product Market Name: Lecturer: Course: Date: [WORDS 1069] Introduction A significant feature of market economies is the impact of supply and demand on price of a product. Interactions between the demand and supply bring about the equilibrium market price. Therefore, commodity price is dependent on the nature of interaction between the supply and demand of the product. Supply and demand signify the willingness of the buyers and the suppliers to participate in buying and selling a product. Exchange of the product will however only take place when consumers and suppliers agree on a price. How market forces determine equilibrium price and quantity Market equilibrium is determined by price mechanism (Merwin, Stern & Jordan 2006). The equilibrium results from the interaction between forces of demand and supply, both of which determine the prices at which products are sold or bought in the market. Simply put, market equilibrium refers to a situation where at a particular price, the quantity demanded and supplied are at equilibrium (Anon 2010). Therefore, the market forces of demand and supply determine equilibrium price and quantity through their interaction. That is, the equilibrium price and quantity is that point where quantity demanded and supplied are equal. For instance, when exchange of agricultural product such as corn takes place, the price that is agreed on is called equilibrium price, whereas the quantity is the equilibrium quantity. When graphically illustrated, market equilibrium is that point where the supply and demand curves intersect at a point where the quantity demanded is the same as quantity supplied. As illustrated in the figure below, sellers and buyers are willing to exchange the quantity “Q” at price “P’’. At this stage, quantity demanded and quantity supplied are equal (McEachern 2008). It is this price P and quantity Q that are usually referred to as equilibrium price and equilibrium quantity respectively. &supplied How price mechanism ensures that equilibrium is stable Price mechanism generally concerns with the manner in which buyers and sellers interact so as to reach at market price. It greatly depends on supply and demand. It is through the interplay of demand and supply that price mechanism ensures that equilibrium price and quantity is stable (Dong & Zhang 2004). As stated above, equilibrium price and quantity is appoint where demand and supply are equal. Therefore, to illustrate how price mechanism ensures that equilibrium price and quantity is stable, it would be essential to consider situations where there is no balance in the market. For instance, when the market price is below the equilibrium price P, there would be higher quantity demanded than that supplied. Under this circumstance, buyers will scramble for few commodities in the market (McEachern 2008). As a consequence, shortage will exist. Due to the shortage, buyers will be willing to pay higher prices for the product. At the same time, suppliers will be willing to supply more at the increased price. This will cause the price to gradually increase until it settles at equilibrium price P, thus bringing back the market price at equilibrium. Likewise, if the price is above the equilibrium price, P, the result would be surplus in the market. At this new price P1, fewer commodities will be demanded while supplies will be willing to supply more of the product, thus resulting into surplus in the market. The reduced demand therefore will cause supplies to be willing to supply the product at lower price. Conversely, consumers would be motivated by the lower prices to increase the amount of purchases they make. This will cause the price P1 to gradually fall back to equilibrium price P. Therefore, a balance would have been restored. &supplied Four factors that will lead to a change in market equilibrium Changes in market equilibrium are influenced by factors such as weather, consumer preferences, change in income level and change in technology. It is believed that with good weather .there will be an increase in supply, particularly of agricultural products. This therefore will shift the supply curve to the right. The quantity demanded however will remain unchanged. There will be no increase in amount of commodities demanded (Anon n.d.). Therefore, in order to clear the market, there will be a movement along the demand curve to a new equilibrium price as shown in the diagram below. &supplied Changes in customer preferences also change market equilibrium. In case buyers change their preferences for a product due to a recent health warning advocating for its consumption, there will be a reduction in demand for the product. This will depict an inward shift of the demand curve (Anon n.d.). And in case there is no reduction in supply, the price will be affected along the supply curve resulting to a lower equilibrium price where demand and supply ultimately reach a balance. This can be illustrated graphically as follows &supplied Technology change causes the quantity of a product supplied to change hence affecting market equilibrium (Berry et al 1995). For instance, technological change may happen where new methods of mechanization are able to plant, fertilize and harvest at lower costs. In which case, the quantity of the product supplied will increase. It is believed that with a change in technology, the supply curve will shift outwards. And if the aggregate demand is unable to efficiently clear the excess supply, the long run effect of technology will reduce prices to a point where the rapidly increasing supply equals the slower moving demand. As a result new equilibrium will be established. &supplied Change in income level will results to a change in market equilibrium. For instance, A rise in income level will increase the quantity of a product demanded in the market. This will cause a rightward shift of the demand curve. Conversely, there will be an upward movement along the supply curve to appoint where quantity demanded equals quantity supplied. There will be a rise in equilibrium quantity and equilibrium price. New market equilibrium will be set at point E1 as shown in the diagram below. Conclusion From the discussion, it is clear that market equilibrium is a point where quantity demanded equals quantity supplied. The market equilibrium is usually determined by interaction of demand and supply. A concept majorly referred to as price mechanism. Price mechanism generally concerns with the manner in which buyers and sellers interact so as to reach at market price. Changes in market equilibrium are influenced by factors such as weather, consumer preferences, change in income level and change in technology. References Acorn n.d. Price Mechanism. Viewed 15 Feb 2014, http://www.acornlive.com/demos/pdf/C4_ECB_Chapter_2.pdf Anon 2010, The Market Forces of Supply and Demand, viewed 14 Feb 2014, http://www.cengage.com/economics/mankiw/samplechapter/Mankiw6e_Econ_Ch04.pdf Anon n.d. When, Why and How Does Equilibrium Change?, viewed 14 Feb 2014, http://www.myecnclass.com/text/OptionsOutcomesCh6.pdf Berry, S, Levinsohn, J & Pakes, A 1995, "Automobile Prices in Market Equilibrium," Econometrica, Vol. 63, No. 4, pp. 841-890. Buchanan, N 2008, "How Realistic is the Supply/Demand Equilibrium Story? A Simple Demonstration of False Trading and its Implications for Market Equilibrium," Journal of Socio-Economics Vol. 37 No. 1, 400-415. Dong, J & Zhang, D 2004, "A Supply Chain Network Equilibrium Model with Random Demands," Appears in European Journal of Operational Research, Vol. 156, 194-212. Mankiw, G n.d., Understand how various factors shift supply or demand and understand the consequences for equilibrium price and quantity, viewed 12 Feb 2014, http://www.csun.edu/sites/default/files/micro3.pdf McEachern, W 2008, Economics: A Contemporary Introduction, Cengage Learning, New York Merwin, E, Stern, S & Jordan, L 2006, “Supply, Demand, and Equilibrium in the Market for CRNAs," AANA Journal, Vol. 74 No. 4, 287-295 Read More