For a manager is a business setting it is important for them to understand how market equilibrium is maintained. Simple economic principles such as supply and demand are crucial in the business world when it comes to everything, especially making very important day to day decisions. The Process
The intersection of the supply curve and the demand curve is considered market equilibrium and the price point (investopedia, 2012). This is another way of saying that the economic forces are balanced or the point where supple equals demand for a product or where the quantity demanded and quality supplied are equal.
This can also be static or dynamic, exist in a single market or multiple markets (investopedia, 2012). There are also factors that can disturb it like change in consumer preferences, this will make the demand drop and there will end up being an excess. When this happens, it is considered a state of disequilibrium and will stay like this until a new equilibrium price/level is established. Surplus and Shortage
When supply and demand do not match, this means that there is either a surplus or a shortage.
To create a surplus the market price must be above the equilibrium price, the quality supplied is great than the quality demanded (Chan, staffwww.edu). This will create a surplus and the market price will fall. A good example from my company in the sales field is when we have open inventory left on one of our radio stations; we will more than likely put those spots on sale to fill them. Lowering the price of the product will make the product’s quantity demand rise until the desired equilibrium is reached. The surplus drives the price down.
When the market price is below equilibrium price, the quantity supplied is less than the quality demanded (Chan, staffwww.edu). This will create a shortage. Market price will rise because of the shortage. In the radio business, when stations become full and there is no inventory left, we are forced to raise...
Please join StudyMode to read the full document