Law of Demand In order for market equilibrium to exist, the economy must have a need for a particular product or services. For there to be a demand, customers must be prepared to pay the established prices set by the industry. After the need for a particular product has been identified, manufacturers can begin producing the products. Law of Supply With supply, the product or services are made available to the economy. When a consumer is prepared to pay the price the market is asking market equilibrium is established. Should there be an imbalance of the demand or supply, there would be no equilibrium.
In cases of supply imbalance, this could cause prices to increase which would inadvertently create business and revenue for the competition. Contrary to supply shortage is an excess of supplies. Excess supplies in the market will cause the market prices to drop resulting in an imbalance in the market equilibrium. Efficient Market Theory Efficient market theory is an investment theory that states it is impossible to “beat he market” because stock market efficiency causes existing share prices always to Incorporate and reflect all relevant information (Investigated, 2014).
Because stock usually trades at fair values the efficient market theory keeps the stock exchange fair and honest. It prevents investors from selling at over Inflated prices or purchasing at underrated prices. Surplus and Shortage Another cause of an Imbalance In the market equilibrium could be a result of supply surplus. A supply surplus could also cause product prices to drop. Because there are ore products available it could mean that customers Just are not buying or that there are too many suppliers of the same product.
The counter to this problem Is to Limit the number of like products available wealth the economy. The opposite effect to a surplus could be very beneficial to business competitors. A shortage would allow a competitor to move the business into the local economy and set prices high. As result of shortages, this would allow the competitors to monopolize the market causing duress to surrounding companies. Real World Experience
A real world example of the free market is when a customer looks for a bargain for consumers prefer to choose the item that has the best price versus the store name. Another factor that plays a role in the decision process is the location. If a customer has to drive further away to make a purchase they may elect to select the most expensive item. Customers can take advantage of supply and demand when the businesses are competing with each other. Conclusion In economics, manufactures and customers are the primary stakeholders in the equilibrating process.