The Principle of Market Equilibrium

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  • Topic: Supply and demand, Economic equilibrium, Partial equilibrium
  • Pages : 2 (444 words )
  • Download(s) : 298
  • Published : January 1, 2011
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Lately, there have had many fluctuations in clothing markets regarding unusually high cotton prices. The changes in cotton clothing market give us a good opportunity to illustrate the Principle of Market Equilibrium that any time there is an imbalance between supply and demand, economies will normally move toward an equilibrium in which no individual would be better off doing something else. In fact, we have now seen that a market tends to have a single price, the equilibrium price at which the quantity demanded of a good or service is equal to the quantity supplied. When the demand and/or supply curves shift, the market price always moves toward the market-clearing price, at which there is neither surplus nor shortage. Clothing is drawing more attention, but how to satisfy people’s garment-shopping need with limited budgets is indeed a thorny problem when input prices seem to get higher and higher. Recently, bad weather in China and India, the currently largest producers of cotton, and severe flooding in Pakistan have contributed to shrinking cotton supplies. The cost of cotton, as a result, has gone up almost 80 percent since July. For these reasons, the supply curve for cotton clothing shifts leftward; that is, producers supply less at any given price. In this situation, everyone would predict that demand for cotton clothing decreases, yet in fact, it is growing. As the economic recovery in the United States began, in particular, apparel makers and retailers placed orders for more inventory, spurring even more demand. Economically speaking, the demand curve doesn’t move along but shifts rightward; people still consume more cotton clothing despite the significant rise in the price. Encountering the rise in input costs, apparel makers attempted to hold the line on prices by, say, looking for more cost-effective materials that do not reduce quality and switching production to countries with lower labor costs or milder customs charges. But unable to catch up...
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