Market Equilibrium Process

Market Equilibration Process
Mark Todd
June 11, 2013
Daniel Rowe

Market Equilibration Process
Market equilibrium means that market price is set when the amount of goods/services demanded by the buyers is equal to the amount of goods or service produced by sellers. This price is called the market clearing price. In market equilibrium the amount supplied is equal to the amount demanded. At equilibrium no one on the demand side or the supply side has any incentive to demand more or less at the equilibrium price. This equilibrium is reached through interactions in the market. If the price is above equilibrium, supply will exceed demand and will put downward pressure on price so that it returns to the equilibrium. Similarly, if the price is below the equilibrium point there will be shortage of supply and there will be pressure to increase the price till it reaches the equilibrium point.
When we compare the demand for food with the demand for Starbucks coffee, we should consider the responsiveness of food and Starbucks coffee to changes in price.   This responsiveness is called elasticity of the quantity demanded of the good to a change in its price.   Food has a lower elasticity of demand where Starbucks coffee has a high elasticity of demand.  
The law of demand says that higher the prices, the lower the quantity demanded and lower the prices, the higher the quantity demanded.   The law of supply says that higher the prices the higher will be the quantity supplied and the lower the prices, the lower will be the quantity supplied.   Determinants of demand are the income of the customers, the size of the number of customers for the product, and the willingness of the people to pay for the product. In case of food and Starbucks coffee demand is determined by the income of the potential customers, the size of the market, and the willingness of customers to pay.   The determinants of supply are the number of sellers in the market, the level of technology,...