Market Equilibration Process

Market Equilibration Process
Market equilibrium occurs when the supply of goods and service are equal to its demand. To understand market equilibrium it is necessary to understand the law of supply and demand which is the heart of the market economy. It is necessary for business managers and leaders to maintain market equilibrium to ensure the business reach its goals and objectives. The content of this paper discusses the market equilibrating process, the law and determinants of supply and demand, efficient market theory, surpluses, and shortages.
The Law of Supply
At one time or another shortage of supplies or goods arise. In this instance buyers compete against one another in relation to the price. When this situation occurs, the price of goods rise and eventually the demand will decrease. As prices increase supplies will increase and as prices decrease supplies will decrease. This is known as the law of supply.
In 2005 south Louisiana experienced the United States greatest natural disaster in history, Hurricane Katrina. As New Orleans and Mississippi coast lines were hit the hardest, thousands of residents fled to Baton Rouge and other surrounding cities for shelter. This affected the housing market drastically. The demand for housing increased while the supply of homes available for purchase and rent was limited, thus increasing the price of homes for sale and rent as buyers competed against one another. I purchased my home in 2004 for $100,500. A close friend purchased her home for about the same size and amenities in 2006 for $175,000. This was a drastic increase. Below is exhibit one courtesy of Pearson Prentice Hall, describing the how the excess demand and limited supply of homes available increased the market equilibrium price from $130,000 to $156,000.

Determinants of Supply
There are many determinants that affect supply, such as production cost. The goal of a company is to maximize profits and an increase in production costs will lower...