Market Equilibrium
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Running head: Market Equilibrium Process Paper
Market Equilibrium Process Paper
University of Phoenix
Economics – ECO561
April 19, 2010
The market equilibrium is described as the point at which the quantities demanded and supplied are equal (McConnell, Brue, & Flynn, 2009). The concept is derived from combining equilibrium price and equilibrium quantity to yield the balance of a specific market. Changes in the determinants of demand, such as consumer expectations and the price of the product can affect the equilibrium of a market. Changes in determinates of supply can also affect a specific market; such as the real estate market. Supply determinates, such as taxes and subsidies, production techniques, and prices of other goods can cause a specific market to decrease or increase in supply, resulting in changes of equilibrium quantity.
At most prices, planned demand does not equal the planned supply; therefore equilibrium will occur where supply meets demand. If the price is below the equilibrium, then demand would be greater than supply, creating a shortage. In response to pricing below the equilibrium, organizations will increase price and supply more, which will result in less demand; therefore the equilibrium price will rise until there is no shortage and supply equals demand. However, if the price is above the equilibrium, then supply would be greater than demand, thereby creating a surplus. In order to eliminate the surplus, the price would have to be reduced as well as the demand.
Understanding supply, demand and market equilibrium will help in determining if new home prices are in or out of balance with the local economy. When we began searching for a new home, we started by looking in a certain location followed by a range that we could afford. Several years ago, the housing market boomed and the demand for new homes was high, individuals were able to increase the sale price of their homes due to the demand from home...
Market Equilibrium Process Paper
University of Phoenix
Economics – ECO561
April 19, 2010
The market equilibrium is described as the point at which the quantities demanded and supplied are equal (McConnell, Brue, & Flynn, 2009). The concept is derived from combining equilibrium price and equilibrium quantity to yield the balance of a specific market. Changes in the determinants of demand, such as consumer expectations and the price of the product can affect the equilibrium of a market. Changes in determinates of supply can also affect a specific market; such as the real estate market. Supply determinates, such as taxes and subsidies, production techniques, and prices of other goods can cause a specific market to decrease or increase in supply, resulting in changes of equilibrium quantity.
At most prices, planned demand does not equal the planned supply; therefore equilibrium will occur where supply meets demand. If the price is below the equilibrium, then demand would be greater than supply, creating a shortage. In response to pricing below the equilibrium, organizations will increase price and supply more, which will result in less demand; therefore the equilibrium price will rise until there is no shortage and supply equals demand. However, if the price is above the equilibrium, then supply would be greater than demand, thereby creating a surplus. In order to eliminate the surplus, the price would have to be reduced as well as the demand.
Understanding supply, demand and market equilibrium will help in determining if new home prices are in or out of balance with the local economy. When we began searching for a new home, we started by looking in a certain location followed by a range that we could afford. Several years ago, the housing market boomed and the demand for new homes was high, individuals were able to increase the sale price of their homes due to the demand from home...