You will prepare and submit a term paper on Understanding how market equilibrium is maintained is essential for business managers. Your paper should be a minimum of 500 words in length. Importance of Market Equilibrium to Business Managers It is an essential move for business managers to get updates of the market trends so that they can make informed decisions on production and supply to the market. Any business manager should have some basic information concerning the rules that control operations in the business world. This paper will identify the skills that can be us to measure determine market equilibrium and the importance of such information to business organization. The paper will also analyze the laws of demand and supply in line with their mutual determinants in the market.
Market equilibrium in a free market environment refers to the time when the quantity of goods supplied in the market balances the demand level in the market. An equilibrium market does not encounter the challenges of excess supply as well as excess demand. In an equilibrium market, buyers and sellers have expounded understanding of the prevailing prices of goods and services as well as the quality of goods and services on offer. Clear knowledge of the prevailing market trends expels any attempts by particular sellers to increase their prices above the market value. A good knowledge of how to maintain market equilibrium is essential for most managers when making decision on the quantity of goods top supply to the market. Insight understanding of market equilibrium also assists in decision making on the methods of production to be employed.
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Business managers ought to have deep understanding of the laws of demand and the determinants of demand. The law of demand states that demand of a particular commodity increases with increase in quality and decrease in price. Since the sole purpose of every business organization is to increase sales volume and make more profits, business managers have no option a part from operating as per the guidelines of the law of demand. In this regard, business managers need to set their operation to ensure production of high quality products that will pose a good competitive advantage in the market (Rothbard, 2006). Improving quality of goods produced by a business organization, promises good sales volume thereby lifting the profit margins of an organization. Similarly, reducing costs of goods on sale by a business organization attracts more demand for that particular product. When demand for a product increases, it is automatic that the particular product will record high and fast sales thus improving the profits due to that product. Demand also increases with increase in the household income. Tastes of particular products also affect the demand depending on the contemporary buyers’ preference (Rothbard, 2006). For particular products also shifts with changes in the quality and price of the substitute products. In addition, demand for a product varies with changes in price of the complimentary products.
The law of supply and the entire determinants of supply are equally important information for managers in understanding market equilibrium. The law of supply implies that increase in price of commodities in the market attracts more supply of goods and services (Depken, 2006). Similarly, fall in the market price of a certain product negatively affects the supply of the product. Increase in the production cost of particular product leads to reduction in market supply and the inverse is true. Supply of a product in the market also increases when there are many suppliers. The quantity of supply of a certain product also depends upon future expectations on prices. Prediction of future price increase will result in fall in supply of a particular product while fall in price in the future results to upward supply trend (Depken, 2006).
Efficient market theory states that all participants in a market setup will obtain a react towards any information that regards the stock market. The stock market is usually affected by factors like inflation, growth, interests, and taxes. Changes in the stock market affect the supply and demand of goods. Any increase in taxes charged in the stock market leads to increase in the costs of products thereby reducing the rate of demand. Inflation in an economy results to increase in the prices in the stock market and this lowers the rates of demand. Fall in the prices of products in the stock market results into increase in the demand of product the stock market (McDonald, 2002).
Excess supply of a particular product in the market leads to fall in prices of that particular product. The registered fall in the price attracts more demand of that particular product. Sometimes, this kind of situation leads to the fall of equilibrium price far much below the price floor. Fall in supply margins of a certain product leads to increase in price of particular product thereby resulting into decline in demand of that specific product. in case of basic products, fall in supply will attract an upward movement in demand gradient accompanied by high prices that may exceed the price ceiling.
Depken, C. (2006).Microeconomics demystified. Sydney: McGraw-Hill Companies Inc.
McDonald, M. (2002).Predict market swings with technical analysis. New York: John Wiley & Sons Inc.
Rothbard, M. (2006).Power and Market. Auburn, Alabama: Ludwig von Misses Institute.
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