Market_Equilibrating_Process

Market Equilibrating Process Equilibrium is the condition of a system in which competing influences are balanced. (Wikipedia, 2010) In the economical terms, the competing influences are supply and demand. Market equilibrium process is the process of keeping supply and demand in a balance which keep prices stable. Excess in supply means that the price is above the equilibrium and it will eventually decrease. Vise versa, when there is low supply, then the price is below the equilibrium and eventually it will go up. Oil Industry In the oil industry, it is quite obvious that OPEC (Organization of Petroleum Exporting Countries) always tries to maintain the equilibrium needed to stabilize the oil prices globally. Whenever supply goes up, we can see the supply curve shifts to the right and equilibrium point will fall hence prices fall. (McConnell, C.R., Brue, S.L., & Flynn, S.M., 2009) To maintain the right income elasticity of oil, OPEC increases or decreases supply to maintain a stable equilibrium at the right price range. Inelastic Gasoline The demand for gasoline is more affected by the economic growth rather than by its own price. Since gasoline is considered essential to many industries, gas price increase will be considered as increased cost and hence leads to inflation as products will cost more. This is where supply of gas is critical, as shortage of supply will shift the supply curve to the left, equilibrium point will rise and price will go up. Once new technologies reveal alternative energy to gasoline with competing cost, then gas will have a competing product. This will make gas more price elastic than it is right now. Consumers, in most cases, will switch to the lower cost alternative as long as it fits their needs. The equilibrium price of oil will probably be lower than it is today. Conclusion Understanding market equilibrium process is essential to maintain elasticity income and adapt to market demand and supply changes. In the case of oil, many governments intervene to stabilize the gas prices and maintain market equilibrium as high prices can lead to economical slow down.