Market Equilibrium and Efficient Markets Theory - Essay Example

The law of supply states that as the price of a product rises, keeping all other factors constant, one would be willing to supply more for sale. Hence, price and quantity supplied are positively related (McConnell, Brue, & Flynn, 2009).

Economic equilibrium would be achieved when the demand and supply of a commodity in discussion meet. This point will be called the optimum level of functioning point in an economy, as every stakeholder can achieve their objective of buying and selling. The equilibrium price is where the quantity demanded and supplied meet. This is the price and buyers and producers buy and sell the same amount of goods (Sloman 1999).

At any point below or above the equilibrium, it will either create excess demand in case of low price, or excess supply in case of higher price. The gap in supply and demand will exist in the short term. However, sellers and buyers would adjust their selling and purchase habits and equilibrium would eventually be achieved. Consider the example of the automobile industry, where demand and supply figures are shown in the table below.

If the price initially started at $5/car, demand would exceed supply by 300 units. At this point, suppliers would not be willing to offer more cars which will result in consumers being unable to obtain all they wanted and would thus be willing to pay a higher for it. Producers, who are unable or unwilling to supply enough to meet the demand, will be more than happy to accept a higher price. This effect of shortage would drive the price up. On the other hand, if the initial price was $15, supply would exceed demand by 250 units causing a surplus in the market. Buyers would be reluctant to buy at such a higher price causing the suppliers to reduce per unit price to reach market equilibrium. At a price of $10, demand and supply are equal causing stability in the market. Efficient Market theory is assumed in the above scenario that all players in the market have complete information regarding the price of products. This means that if a supplier decreases the price of a product, every stakeholder is well aware of it and will not pay a higher price to any other supplier. This will keep the market stable and would not result in deceptive practices by suppliers. Read More