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Market Equilibrium Process ECO/561 August 13, 2012

MARKET EQUILIBRIUM PROCESS Market Equilibrium Process Understanding how market equilibrium is maintained is essential for business managers. It is important to consider how economic principles such as supply and demand are part of every day business decisions. Economic principles such as concepts of supply, demand, and market equilibrium and their relationships to real world examples will be discussed. To show how the law of demand works we will use uniformed school clothes as an example. This is the first year one of my children is adhering to a uniform dress code policy. The store retails school clothes such as khaki pants at $12.97 a pair and solid color polo style shirt for $8.97 a shirt. During the latter summer months, the retail store has their prices for khaki pants at $8.97 and polo style shirts for $4.97 a shirt. As the prices decrease, consumers can purchase supplies at a lower price. Prices are lower attracting more customers for the store that implies the law of demand concept. The law of demand assumes that consumers will buy more of a product at a low price than a high price. The closer it is to school starting, the more customers, which means store can lower prices. A change in either demand or supply changes the equilibrium price and quantity (McConnell, Brue, & Flynn, 2009). As prices rise, the quantity supplied rises; as prices fall, the quantity supplied falls. The law of supply is the relationship between the quantity supplied rising and the quantity supplied falling. Determinants of supply are the other things equal that can and do affect supply. The basic determinants of supply are (1) resource prices, (2) technology, (3) taxes and subsidies, (4) prices of other goods, (5) producer expectations, and (6) the number of sellers in the market equilibrium (McConnell, Brue& Flynn, 2009). Companies such as Nine West can sometimes use their plant and equipment to produce other company logo goods, such as purses as well as shoes. The higher prices of the other good

MARKET EQUILIBRIUM PROCESS may persuade the Nine West manufacturers to switch production in order to increase profits for the company. Equilibrium price or marking clearing price is the price where the intentions of buyers and sellers match (p. 54). According to McConnell, Brue, and Flynn it is the price where quantity demand equals quantity supplied (McConnell, Brue, & Flynn, 2009. Buyers and sellers drive the price to the equilibrium price through competition; when it is there, it remains unless it is disturbed by changes in demand or supply (p. 55). When quality supplied exceeds quantity demanded this is known as surplus. Surplus drive prices down. When quantity demanded exceeds quantity supplied it is a shortage. Knowing the market equilibration process is important for manager when making sound business decisions, as it relates to demand and supply. Demand and supply are the tools that can help us understand how individual markets work. Through demand and supply, we can show how the decisions of buyers of goods or services interact with the decisions of sellers to determine the equilibrium (McConnell, Brue& Flynn, 2009).

MARKET EQUILIBRIUM PROCESS References McConnell, C. R., Brue S.L, & Flynn, S.M. (2009). Economics: Principles, problems, and policies (18th ed.). New York: McGraw Hill/Irwin