Global Journal of Commerce & Management Perspective
Open Access

Market Equilibrium: Overview

Daveed Smeeth^{* *}Correspondence: Daveed Smeeth, Department of Economics, Harvard University, Cambridge Street, Cambridge, USA, Email:

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Description

Market equilibrium happens when market supply equals market demand, if the market rate is above the equilibrium rate, there will be downward pressure on the rate as suppliers decrease their production and lower their rates to create more demand until market equilibrium is reached. Usually, an over supply of goods or services causes rates to go down, which consequences in higher demand though an under supply or shortage causes prices to go up resulting in less demand. Customers and producers react variously to price changes. Higher rates tend to reduce demand even though encouraging supply and lower rates increase demand in the period of discouraging supply. Economic theory suggests that, in an unrestricted market there will be a single rate which herd demand and supply into balance, called equilibrium rate. Both parties require the scarce resource that the other one has and hence there is a considerable incentive to engage in an exchange.

In its simplest form, the constant collaboration of buyers and sellers enables a rate to emerge over time. It is often difficult to appreciate this process as the wholesale rates of most manufactured goods are set by the seller. The buyer either accepts the rate or doesn’t make the purchase. While an individual customer in a shopping mall might haggle over the rate, this is doubtful to work, and they will believe they have no influence over rate. However, if all potential buyers haggled, and none accepted the set rate, then the seller would be quick to reduce rate. In this process, collectively, buyers have influence over market rate. Eventually a rate is found which shows an exchange to take place. A rational seller would take this a step further, and gather as much market information as possible in an attempt to set a price which achieves a given number of sales at the outset. For markets to work, an effective flow of information in the middle of buyer and seller is essential.

Equilibrium rate is also known as market clearing rate because at this rate the exact sum that producers take to market will be purchase by Customers, and there will be nothing ‘left over’. This is well organized because there is neither an excess of supply and wasted output, nor a shortage the market clears efficiently. This is a central feature of the rate mechanism, and one of its significant benefits. At a rate higher than equilibrium, demand will be less than 1000, but supply will be more than 1000 and there will be an excess of supply in the short run. Graphically, we say that demand contracts inwards across the curve and supply extend outwards along the curve. Both changes are called movements across the demand or supply curve in response to a rate change.

Changes in equilibrium

In detail, changes in the underlying factors that affect demand and supply will cause shifts in the position of the demand or supply curve at each and every rate. Whenever this happens, the original equilibrium rate will no longer equate demand with supply, and rate will modify to bring about a back to equilibrium. At the peak level of demand, keeping the rate at 30p would lead to an excess of demand over supply, with demand at 1400 and supply at 1000, with an excess of 400. This will act as an incentive for the seller to hike price, to 40p. Equilibrium will be re-established at the peak rate. In a competitive market, companies may enter or leave with difficulty. Firms may be allured into a market for a number of reasons, but especially because of the chance of profit. This causes the market supply curve to shift to the right. Hike rates may provide a sufficient incentive and available a signal to potential entrants to involve in the market.