Market Equilibration Process Paper - Essay Example

Market Equilibration Process Paper Demand Demand can be defined as a consumer’s desire and willingness to pay a price for a specific quantity of goods or services. The relation between the quantity of goods demanded and price is an inverse one. People demand more of goods when their price goes down and vice versa. Demand often changes over a period of time and it is affected by multiple factors. There are multiple determinants of demand. However, I will discuss the most important ones in this paper.

According to Cerebellum Corporation., & Sunburst Visual Media. (2009).Business basics series: Supply & demand. a key determinant of the level of demand is disposable income. People usually tend to demand more of a thing when their disposable income increases. However, there are other kinds of goods whose demand decreases with an increase in income and are called inferior goods. Taking a very simple to explain it, a soap can be defined as an inferior good when a person who’s income increases replaces a soap with a liquid hand wash.

Another important determinant is taste of customers. There are trends in the market which must be followed if demand for a particular product is to be increased. Fashion clothes for example are highly demand soon after fashion weeks. Other important determinants of demand include the availability of complements and substitutes, population trends and expectations of price rise and fall. Supply Supply can be defined as the total amount of a product available for purchase at any price. There is direct relationship between price and quantity demanded as suppliers are ready to provide high quantity of goods when prices are high and vice versa.

A key determinant of the level of supply in a market is the amount of spare production capacity. The higher the amount of spare capacity, the greater is the amount by which production can be increased. Supply can also be increased by the advent of a technological change which results in greater and more effective production of goods. Other important determinants include the change in production expectations, change in the number of suppliers and the change in the price of substitute and complement products.

Efficient Market Theory According to Willgoos, R., & SVE & Churchill Media (Firm). (2004).Economics: Supply & demand. in the efficient market theory, there is perfect information available to producers and customers of good. If this were to happen, then the level of goods produced and consumed would be equal thereby resulting in no surplus or deficit. According to the theory all market participants receive and act on the information as soon as it becomes available. Surplus And Deficit Most market investors don’t believe in the teachings of the efficient market theory.

Accordingly, not everything that’s produced will be sold and many a times more of a product will be demanded then produced. A surplus occurs when at a given price, the quantity of good supplied exceeds the goods demanded so there is excess produce available in the market. A deficit is a complete opposite of a surplus. Here the overall market demand for good exceeds supply so there is a shortfall of goods in the market. Such a situation pushes up price of goods. How Such Information Is Relevant To Business Managers It is very important for business managers to have a sound knowledge of the market equilibrium process.

It helps then in deciding how much of goods should be produced by looking at the current market situation. Moreover, price elasticity of demand would give a more accurate picture to managers of how their products are performing and what decisions should be taken. According to Child, R., New Dimension Media, Inc., & Insight Media (Firm). (2007). Simple supply & demand., price elasticity of demand simply tells a manager what effect a price change would have on the quantity of goods demanded. The manager can take this price sensitive into account when deciding prices and taking other relevant decisions.

Bibliography Top of Form Child, R., New Dimension Media, Inc., & Insight Media (Firm). (2007). Simple supply & demand. Chicago, IL: New Dimension Media. Bottom of Form Top of Form Cerebellum Corporation., & Sunburst Visual Media. (2009).Business basics series: Supply & demand. San Francisco: Cerebellum Corp. Top of Form Willgoos, R., & SVE & Churchill Media (Firm). (2004).Economics: Supply & demand. United States: SVE & Churchill Media. Bottom of Form Bottom of Form