The market equilibration process explains what occurs when consumers and sellers make decisions in an efficient market (McConnell, Brue, & Flynn, 2009). Buyers and sellers own most of the resources in the market and compete to obtain what they want. The efficient markets theory speculates that buyers and sellers are on an even playing field when trading assets and no one has an advantage over the other to make a profit based on analysis and prediction (Efficient markets hypothesis, 2012). Possessing an understanding of economic principles is necessary for entrepreneurs when making essential business decisions. The objective of this paper is to clarify the market equilibration process and establish how it relates to the rise and fall of house prices.
Consumer demand and seller supply are the foundation of the market equilibration process. The laws of supply and demand explain how the relationship between price and quantity relate to the process. The law of demand explains how demand rises and falls as product price increases and decreases (McConnell, Brue, & Flynn, 2009). Provided there are no other factors to consider, consumers will buy more of a particular product when the price falls and less of it when the price rises. The law of supply demonstrates how quantity supplied increases and decreases as the price of a product rises and falls (McConnell, Brue, & Flynn, 2009). Basically, suppliers prefer to sell their goods at higher prices so that they make more of a profit.
When buyers and sellers agree on a price, market equilibrium price, and quantity are achieved. Market equilibrium price and quantity rise and fall based on changes to supply and demand such as taxes and subsidies, prices of other goods, consumer preferences, number of buyers in the market, and consumer expectations” (McConnell, Brue, & Flynn, 2009, p. 48-52). These external forces cause a shift in supply and demand as demonstrated in Appendix...