Free Market Equilibration Process Essay Sample
This paper seeks to explore the concepts of Market Equilibration Process with more emphasis on demand, supply, and equilibrium (Fama, 1970). I will establish the relationship between market equilibration processes and a real world experience that occurs frequently in the market. Other areas that shall be addressed in the paper include laws and determinants of demand and supply, surplus and shortage, and efficient market theory. In the appendix, I shall provide a graph that shows the shifts in demand and supply in relation to pricing.
Laws and Determinants of Demand
Demand is an economic concept that shows the amount of products that the consumers are willing and able to buy in a given range of pricing at a specified period of time. The law of demand states that the consumers tend to increase their purchase when prices are low and vice versa (Fama, 1970). The determinants of demand include taste and preference, price of other related products, incomes, expectations from the product, and business status. An example could be the Bata Shop. A normal retail shop sells the shoes at $100. However, during back to school time, the price is reduced by 30%, making the shoes to be $70. As a result, many people would buy Bata shoes.
Laws and Determinants of Supply
Supply is an economic concept that reveals the amounts of products that manufacturers are willing and able to produce in a given range of pricing at a specified period of time. The law of supply states that as prices increases, manufacturers tend to make more products available and vice versa (Fama, 1965). The determinants of supply include technology, price of raw materials, presence of competitors, price of other related products, and the expectations of the seller. The supply of Bata shoes is slightly low during school sessions. However, the duration preceding opening of schools often characterized by increased supply.
Efficient Markets Theory
A market is considered efficient only and only if the prices reflect all the available information in the market (Burton, 1987). This theory asserts that it is impossible for investors to sell inflated stocks or buy undervalued products since stocks are traded at fair value. There is no real connection in this subject.
Surplus and Shortage
Both shortage and surplus drastically affects the market equilibration process. The Bata Company has always been affected by the problem of surplus as it continues to produces more shoes when demand reduces.