Market_Equilibration_Process

Market Equilibration Process Paper Bryan Pelton ECO/561 February 8, 2012 Michael Coffey Market Equilibration Process Paper In today’s market, consumers are generally weary about what purchases they make due to the fact that there are many competitors competing for the same potential customers. The market equilibration process is such that when goods are in short supply, buyers bid against one another in relation to its price which causes the price of the good to rise. This rise in price increase will eventually cause a drop in demand and will then cause the supply to increase following the law of supply. This pattern will continue until the quantity demanded is equal to the quantity supplied and the price suppliers want to supply the good at equals the price the buyers want to purchase the goods at (McConnell et al. 2009). Consumers today have grown to rely on technology, specifically cellular phones, in their everyday life which is why they are a perfect example to illustrate market equilibration. As new technology in cell phones becomes available, consumers are generally eager to purchase the latest and greatest product whether it is for its practical uses or simply to be a part of the “in crowd”. With this being well known, suppliers have a great responsibility in researching and applying the laws of supply and demand to attempt to distribute their goods appropriately. The law of demand states that consumers buy more of a good when its price decreases and less when its price increases. The law of supply states that at higher prices, producers are willing to offer more products for sale than at lower prices, that the supply increases as prices increase, and decreases as prices decrease, that those already in business will try to increase productions as a way of increasing profits. With that said, to achieve market equilibrium, new cell phones must be priced to establish competition such that the amount sought by buyers is equal to the amount produced by the sellers. This price is called the equilibrium price and will not change until there are changes within demand or supply. Achieving the equilibrium price is no easy task. Using the efficient market theory, one can usually assume that a price is fair when the price reflects all available information. Some of the information that is crucial in this case is the determinants of supply and demand. As for demand, to obtain a fair price one must consider several areas including: population of a region, average incomes, tastes and preferences, substitutes and their prices, if there are complements for a product and price expectations. When applying these determinants to cell phone technology, not all have a major impact. However, preferences, substitute prices, and price expectations may have an effect. Regions where on average there is an older population, might not have the demand for the latest and greatest technology in cell phones and fro the price they might settle for a cheaper substitute that will meet their needs. Also, as we all know, prices for technology generally drop as new technology replaces them so demand could also drop in these areas because there is no rush to have the latest cell phone. Supply determinants also play a major role in achieving an efficient market. Determinants in this process include: number of firms in a particular area, cost of production, technology and again, price expectations. Supply is more difficult to determine when it comes to new cell phone technology because the technology is always growing and the cost of production may or may not deviate too excessively and it has always been well known that as future new technology comes out, the prices on previous models will drop. The one determinant that will greatly affect supply is the number of firms. This day in age, one can pretty much purchase a cell phone at any store so as more suppliers arise, and carry the same products, it may cause an abundance or surplus of that particular product. The way cell phone service providers have overcome this issues is they all offer different plans for the same cell phone in an attempt to persuade consumers to purchase the product form them. However in a similar situation with a different product, the number of firms supplying the same product can greatly affect the price and whether or not there is a surplus or shortage occurrence. Attaining market equilibration is a difficult process and is one that will never be perfect. Economists must gather all the information they can to attempt to set a price at which they deem as fair and then it is simply a matter of watching how supply and demand is affected. This is a continuous process that involves making adjustments in price that will adversely change the curve in supply and demand in hopes that everyone involved comes out on top. References McConnell, C.R., Brue, S.L., & Flynn, S.M. (2009). Economics: Principles, problems, and policies, 18th Edition, New York: McGraw Hill