McConnell, Brue, and Flynn (2009) define equilibrium price as, “the price where the intentions of buyers and sellers match” (p. 54), and equilibrium quantity as, “the quantity demanded and quantity supplied at the equilibrium price in a competitive market” (p. 54). This information appears straight forward. Understanding the various components and economic roles each play to reach equilibrium will aid in comprehension of the processes. Components of market equilibrium include determinants of the law of demand, determinants of the law of supply, efficient markets theory, and market surplus or shortages. The tire industry continually experiences fluctuations in demand, supply, and price. The following discusses the components of the effects of a tire manufacturer in original equipment (OE) and replacement (RE) tire markets and changes they make to reach market equilibrium.
Supply and Demand
The law of demand defines the inverse or negative relationship between price and quantity by stating when price fall, demand quantities rise and price rises, demand quantities fall (McConnell, Brue, & Flynn, 2009). The demand curve slopes downward to the right as prices fall and demand increases (Figure C, Appendix A). Because there is an initial surplus, or higher quantity available compared to demand, explains the curvature of the demand curve. From 2008 to 2009, a major economic crisis caused changes to consumer incomes causing fewer consumers to purchase new cars. The change in the demand for new cars had a negative effect to demand for tires from original equipment manufacturers (OEMs). Simultaneously, the pricing to OEMs began to drop as the demand fell. The determinant of decrease in demand of new tires for OEM’s was consumer’s income....
Please join StudyMode to read the full document