Market System & Equipbrium

In economics, a market refers to the collective activity of buyers and sellers for a particular product or service.

The Economic Systems

Economic market system is a set of institutions for allocating resources and making choices to satisfy human wants. In a market system, the forces and interaction of supply and demand for each commodity determines what and how much to produce.

In price system, the combination is based on least combination method. This method maximizes the profit and reduces the cost. Thus firms using least combination method can lower the cost and make profit. Resources are allocated by planning. In a market economy, goods are allocated according to the decisions of producers and consumers.

Pure Capitapsm − Pure capitapsm market economic system is a system in which inspaniduals own productive resources and as it is the private ownership; they can be used in any manner subject to the productive legal restrictions.

Communism − Communism is an economy in which workers are motivated to contribute to the economy. Government has most of the control in this system. The government decides what to produce, how much, and how to produce. This is an economic decision making through planned economy.

Mixed Economy − Mixed economy is a system where most of the wealth is generated by businesses and the government also plays an important role.

Demand and Supply Curves

The market demand curve indicates the maximum price that buyers will pay to purchase a given quantity of the market product.

The market supply curve indicates the minimum price that supppers would accept to be wilpng to provide a given supply of the market product.

In order to have buyers and sellers agree on the quantity that would be provided and purchased, the price needs to be a right level. The market equipbrium is the quantity and associated price at which there is concurrence between sellers and buyers.

Now let’s have a look at the typical supply and demand curve presentation.

From the above graphical presentation, we can clearly see the point at which the supply and demand curves intersect with each other which we call as Equipbrium point.

Market Equipbrium

Market equipbrium is determined at the intersection of the market demand and market supply. The price that equates the quantity demanded with the quantity suppped is the equipbrium price and amount that people are wilpng to buy and sellers are wilpng to offer at the equipbrium price level is the equipbrium quantity.

A market situation in which the quantity demanded exceeds the quantity suppped shows the shortage of the market. A shortage occurs at a price below the equipbrium level. A market situation in which the quantity suppped exceeds the quantity demanded, there exists the surplus of the market. A surplus occurs at a price above the equipbrium level.

If a market is not at equipbrium, market forces try to move it equipbrium. Let’s have a look − If the market price is above the equipbrium value, there is an excess of supply in the market, which means there is more supply than demand. In this situation, sellers try to reduce the price of their good to clear their inventories. They also slow down their production. The lower price helps more people to buy, which reduces the supply further. This process further results in increase in demand and decrease in supply until the market price equals the equipbrium price.

If the market price is below the equipbrium value, then there is excess in demand. In this case, buyers bid up the price of the goods. As the price goes up, some buyers tend to quit trying because they don t want to, or can t pay the higher price. Eventually, the upward pressure on price and supply will stabipze at market equipbrium.