Market_Equilibrium

Market Equilibration Lakeesha Neighbors ECO/561 Alfred Igbodipe August 5, 2013 Market Equilibration Organizations strive to meet market equilibrium price which is “the price at which the total quantity supplied of the product equals the total quantity demanded” (McConnell, Brue, & Flynn, p. 188, 2009). If there is more supply than there is demand, there will be a surplus of goods available, however if there is more demand than supply there will be a shortage. The introduction of goods into the market can shift the supply or demand curve, this is illustrated with the introduction of the Vietnamese into the coffee industry. Coffee was not central to Vietnam until the 1980’s, however it was their increased interest in 1990’s that led to the growth of supply to the market and therefore affected the price of this good. Vietnam Coffee Boom From 1990 to the year 2000 “Vietnamese farmers, approximately 80% of them smallholders, planted more than a million hectares of Robusta coffee” (Ha & Shively, 2008, p. 312). Several events lead to the increased growth of coffee bean producers in Vietnam including “policy of privatization, economic liberation, state-sponsored migration, and price spikes generated by frosts in Brazil” (Ha & Shively, 2008, p. 312). The introduction of the Vietnamese into the coffee bean industry caused a shift in market equilibrium. [pic] The price of coffee declined as a result of “rising stocks, inelastic demand and a shift toward low-cost Robusta for processing” (Ha & Shively, 2008, p. 312). Ha and Shively (2008) report that there was a surplus in production of the good which caused a price reduction. Demand and Supply The law of demand suggests that “things equal, as price falls, the quantity demanded rises, and as price rises, the quantity demanded falls (McConnell, Brue, & Flynn, p. 47, 2009). Taking coffee into account, the price elasticity of demand of a good is determined in several ways. If there is an increase in the amount of substitutes for coffee available for consumers to choose from, the price elasticity of demand will be higher for this good. The price of the good in relation to the consumer’s income is also taken into account. If the price or increase in price would not be a hardship to the consumer, the good will have a lower price elasticity of demand. Time is also taken into consideration to determine a good’s price elasticity of demand. Just as there is a formula for the price elasticity of demand of a good, the price elasticity of supply is concerned with how price changes affect quantities supplied by producers (McConnell, Brue, & Flynn, p. 127, 2009). If producers are quickly able to shift “resources between alternative uses” the price elasticity of demand increases (McConnell, Brue, & Flynn, p. 123, 2009). The determinants of supply include “resource prices, technology, taxes and subsidies, prices of other goods, producer expectations, and the number of sellers in the market” (McConnell, Brue, & Flynn, p. 52, 2009). Furthermore “firms will produce and offer for sale more of their product at a high price than at a low price” (McConnell, Brue, & Flynn, p. 51, 2009). Surplus and Efficiency Consumer surplus is “the difference between the maximum prices a consumer is willing to pay for a product and the actual price” (McConnell, Brue, & Flynn, p. 126, 2009). If the maximum price a consumer is willing to pay for coffee is $4.00 per pound and the actual price is $1.00 per pound $3.00 would be the consumer surplus. The producer surplus is “the difference between the actual price a producer receives and the minimum acceptable price” (McConnell, Brue, & Flynn, p. 127, 2009). If the actual price of coffee is $3.00 per pound but the seller receives the equilibrium price of $8.00 per pound the seller would have received a producer surplus of $5.00 per pound. Consumer surplus and producer surplus help to determine whether a market is efficient or inefficient. Figure 6.7 displays efficiency because it shows at “Q1 maximum willingness to pay equals minimum acceptable price” (McConnell, Brue, & Flynn, p. 128, 2009). If consumer surplus and supply producer surplus were not equal the market would not show efficiency. [pic] Figure 6.7 Efficiency: maximum combined consumer and producer surplus (2009) Conclusion Market equilibrium is an important concept for both consumers and producers. When there is a surplus of goods, as seen in the production of coffee in Vietnam, the result will be a decrease in price for that good. Striving to create a balance between goods supplied and goods demanded will reduce incidences of surplus. Firms should always seek market efficiency as this will create a surplus in revenue for both consumer and producer. References Ha, D.T., & Shively, G. (2008, May). Coffee boom, coffee bust and smallholder response in Vietnam's central highlands. Review of Development Economics, 12(2), 312-326. doi:10.1111/j.1467-9361.2007.00391 McConnell, C.R., Brue, S.L., & Flynn, S.M. (2009). Economics. Principles, Problems, and Policies, Eighteenth Edition (18th ed.). Retrieved from The University of Phoenix eBook Collection database.