Running head: MARKET EQUILIBRIUM

Market Equilibrium
October 17, 2011

Market Equilibrating Process

Market equilibrium is the process when the number of goods supplied equals the number of goods demanded. Once the number of goods supplied equals the number of goods demand, the market situation at that moment is said to be in equilibrium. To go into depth we need to know about two very important laws within economics which is the law of demand and the law which governs supply. The law of economic demand indicates that with things remaining the same, with every drop in the price of a product, the demand of that product continues to increase and so on. However, the law of demand does not remain true in the real world because the assumption that other this reaming same is not valid. There are variables such as preferences of the consumer, expectations about the prices or incomes in the future, income level of consumer, tastes and prices of related goods (substitutes), advertising efforts, size of population, and a plethora of factors that can affect demand. If we look at the above graph we can find that as the price of the product decreases from P to P’ the quantity demand increases from Q to Q’. Now as the demand increases, there is a mismatch of demand and supply in the economy and due to this there is an extra shortage of EQQ’E’ in the economy causing a market mismatch. To recover this supply curve shifts to right and removes this shortage in the economy and brings the market to equilibrium. Similarly, the law pertaining to supply indicates that with things remaining the same, as the price of goods rise, quantity of those goods that are provided will rise and vice versa. With the law of supply, like the law of demand doesn’t hold true in the real world because of the same assumption. In the real world apart from change in price there are various factors that affect the supply. These factors are price of resources, production technology, products on price, other prices, seller’s expectations and the number of sellers in the market. If we look at the