Market Equilibration Process Essay
Market Equilibration Process
The economy affects all areas of one’s life and understanding the laws of supply and demand allow one to understand when the market is in a state of equilibrium. This paper discusses market equilibrium associated with the supply and demand of sugar cane in Brazil. The author will discuss the law of supply and demand with the detriments of demand and supply, describe efficient markets theory, and explain surplus and shortage.
Brazil is one of the world’s largest suppliers of sugar, but inclement weather has decreased sugar supply. Brazil delivers more than 50% of the world’s sugar, and the 2011 decline is the first since 2006 (Roseman, 2011). With the decreased sugar crop, the price of sugar is increasing, thus all products using sugar will increase in price as a result of the shortage. The rise in the cost against the supply and demand of sugar takes the sugar market out of equilibrium. Market equilibrium can only be established when quantity demanded meets the quantity supplied (McConnell, Brue, & Flynn, 2009). See the graph showing the market for sugar in a state of equilibrium, and the market as supplies dwindle and prices rise. For the sugar to reach market equilibrium again the supply of sugar must be raised or the demand for sugar must decrease. By raising the price of sugar, the market demand will decrease, thus causing the market to reach a state of equilibrium again.
The Law of Supply and Demand
For one to understand market equilibrium, one must have a valid understanding of the law of supply and demand. Generally speaking, the law of supply and demand is defined as the producers supplying the goods that people are searching for or want (What is Economics?, n.d.). A higher demand of product causes manufacturers to increase price, but increased price means consumers are less likely to purchase, thus causing a shift in the supply and demand of the product. Likewise, if a product is in short supply, the demand increases causing producers to increase price, thus decreasing demand (McConnell et al., 2009).
Efficient Market Theory
“A competitive market not only rations goods to consumers, but allocates society’s resources efficiently to the particular product” (McConnell et al., 2009, p. 56). This happens because competitors will use the latest technology and resources to ensure production costs remain low, thus allowing competitors to compete for the best price in the market. This results in productive efficiency or producing products in the least expensive way (McConnell et al., 2009). In addition to productive efficiency, competitive markets also have one other attribute. Competitive markets produce allocative efficiency, or the producers’ ability to provide the “best mix of products and services that consumers’ value” (McConnell et al., 2009, p. 56). The efficient market theory suggests that producers of goods and services control the market by identifying the most competitive pricing.
Surplus and Shortage
Everyone has a definition of surplus and shortage, but in economics these two bring special situations into the economy. Surplus and shortage cause fluctuations of price from the level of market equilibrium. A surplus of goods in any area causes consumer prices to drop, thus hurting the competitive market (McConnell et al., 2009). Consumers buy the surplus, but organizations sell at a loss. Just as surplus of goods hurts the competitive market, so does a shortage. A shortage is created when the price of a good drops below the equilibrium level, thus raising consumer demand. The demand for the product is higher than the quantity supplied (McConnell et al., 2009). This will drive consumer prices higher, thus causing more and more consumers to stop buying the product. Although one might see a higher price to consumers as a benefit to the suppliers, in the end it results in lost profit as a result of lost sales.
To effectively manage, own, or market products one must have valid understanding of the market equilibration process. This process is essential to understanding what governs supplier production, consumer costs, and organizational profit. To remain in the competitive market, the organization must strive to remain at the cusp of an equilibrium market.
Colander, D. C., Sephton, P., & Richter, C. (2003). Chapter 5: Using supply and demand. In Macroeconomics (2nd Canadian ed., pp. 104-131). Retrieved from http://highered.mheducation.com/sites/0070901104/information_center_view0/sample_chapter.html McConnell, C. R., Brue, S. L., & Flynn, S. M. (2009). Economics: Principles, problems, & policies (18th ed.). Retrieved from https://newclassroom3.phoenix.edu/Classroom/#/contextid/OSIRIS:47397274/context/co/view/home Roseman, E. (2011, July 7). Poor Brazilian crop threatens sugar supplies. The Sovereign Investor Daily. Retrieved from http://thesovereigninvestor.com/commodities/sugar-supplies-threatened-by-poor-brazilian-crop/ What is Economics? (n.d.). http://www.whatiseconomics.org/the-law-of-supply-and-demand