Market Equilibrium Process
August 31, 2014
Professor Kate Stowe
Market Equilibration Process
Equilibrium can be defined as a state where the demand and supply balance one another and that in result stable the prices. The current economic situation causes a state of disequilibrium in housing industry. Because of the economic condition, people are losing their jobs or they are not receiving enough pay so it becomes difficult for the people to purchase a house. This paper will explain about the market equilibrium of housing industry and how the changes in supply and demandresulted in disequilibrium. Before 2005, the prices of homes were increasing dramatically, which leads to an decrease in supply, but increase in demand. Homeowners were looking ways to obtain loans from lenders. People were turning over properties anticipating the market to continue to blast. But after the economic crisis many of the people lost their jobs. Banks also were reluctant to give loans and it became difficult for the people to afford the house. Soon the market failed, and the price of houses declined. Soon after, houses went into foreclosure and the demand for buying a house is decreasing while supply was higher. There was a downpour of small sales and foreclosures. People lost their jobs and families started to rent instead of buying a house. Adjustments in the cost of homes are more significant to gain the market equilibrium rather than the reduction in the price. Supply
Investopedia defines supply as “how much the market can offer. The quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price” (Heakal, 2014). The law of supply states that as the price rises, the quantity of supply rises; if the price fall the quantity of supply fall. The determinants of supply are technology, resources, number of sellers in the market, taxes, prices, subsidiaries, and producer expectations (McConnell, Brue, & Flynn, 2009). Considering today’s situation, there is an increase in supply of houses. More houses are available for sale but the people are unable to afford it.
Investopedia also defines demand as “how much (quantity) of a product or service is desired by buyers. The quantity demanded is the amount of a product people are willing to buy at a certain price” (Heakal, 2014). The law of demand is “other things equal, all prices decrease, the quantity demanded elevates; as the price elevates, the quantity demanded drops” (McConnell, Bruce & Flynn, 2009). Determinants of demand are consumer preference, price-related goods, income, number of buyers, and expectation of future. Now a days, people are unable to afford the houses therefore there is a decrease in the demand of houses.
Efficient Market Theory
This theory proposes that market observers accept and proceed on pertinent information as soon as it is accessible. Supporters of the competent market hypothesis think that the stock market information is ideal. Shareholders and investors may have access to the information. Everyone can obtain the same information and facts of a stock; the value of the stock should mirror the prospect and knowledge of every investor. Surplus and shortage
When supply exceed i.e. the supplied quantity is greater than demanded quantity then a market surplus occurs. When the demand exceeds i.e. demanded quantity is greater than quantity demanded then a market shortage occurs. Housing market is facing the surplus situation as the more houses are available but the demand to purchase the house is less.
People’s personal lives and experiences are comparable to identifying equilibrium in a market. If the people lose their job or they do not have enough...
References: Heakal, R. (2014). Economics Basics: Supply and Demand | Investopedia. Retrieved from http://www.investopedia.com/university/economics/economics3.asp
McConnell, C. R., Brue, S. L., & Flynn, S. M. (2009). Economics: Principles, problems, and policies (18th ed.). Boston, MA: McGraw-Hill Irwin.
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