Market_Equilibrium

Running head: Market Equilibrium Process Paper Market Equilibrium Process Paper University of Phoenix Economics – ECO561 April 19, 2010 The market equilibrium is described as the point at which the quantities demanded and supplied are equal (McConnell, Brue, & Flynn, 2009). The concept is derived from combining equilibrium price and equilibrium quantity to yield the balance of a specific market. Changes in the determinants of demand, such as consumer expectations and the price of the product can affect the equilibrium of a market. Changes in determinates of supply can also affect a specific market; such as the real estate market. Supply determinates, such as taxes and subsidies, production techniques, and prices of other goods can cause a specific market to decrease or increase in supply, resulting in changes of equilibrium quantity. At most prices, planned demand does not equal the planned supply; therefore equilibrium will occur where supply meets demand. If the price is below the equilibrium, then demand would be greater than supply, creating a shortage. In response to pricing below the equilibrium, organizations will increase price and supply more, which will result in less demand; therefore the equilibrium price will rise until there is no shortage and supply equals demand. However, if the price is above the equilibrium, then supply would be greater than demand, thereby creating a surplus. In order to eliminate the surplus, the price would have to be reduced as well as the demand. Understanding supply, demand and market equilibrium will help in determining if new home prices are in or out of balance with the local economy. When we began searching for a new home, we started by looking in a certain location followed by a range that we could afford. Several years ago, the housing market boomed and the demand for new homes was high, individuals were able to increase the sale price of their homes due to the demand from home buyers. As home prices rose in response to the increase in demand; so did the equilibrium price, thereby keeping the market sustained. Buyers were excited to buy homes that increased in value, based on the assumption that it home would increase again in value the following year. Sellers were eager to sell because they were able to make far more than their principal and lenders were willing to lend because of the security in home ownership and its rising value. When we purchased our home we bought it prior to the housing bubble and we sold it right before the bubble burst, unlike most people who are stuck in the present home market conditions. Currently, we are experiencing a surplus where home prices have risen above the equilibrium price, this caused home prices to become stagnate where it will remain until the market can reach equilibrium. The current recession has significantly impacted the home market; interest rates are climbing, lenders are not lending money, unemployment is high and a majority of home owners are upside down in their mortgage. The increase in supply and the decrease in demand have resulted in a price drop greater than that resulting from either change alone (McConnell, Brue, & Flynn, 2009). The decrease in demand is greater than the increase in supply, which will result in a decrease in the equilibrium quantity and price (McConnell, Brue, & Flynn, 2009). Decreases in both equilibrium quantity and price are resulting in the re-setting of the home real estate market bringing home values back to a more true equilibrium price and quantity. References McConnell, C. R. ,Brue, S. L., & Flynn, S.M. (2009). Economics: Principles, problems, and policies (18th ed., pp 54-57). New York: McGraw-Hill Irwin.