Market Equilibrium Essay Example

Equilibrium is that state when forces of demand meet that of supply, thus creating the desired and efficient effect of price-mechanism. The state of equilibrium is highly beneficial for the society as it at this point that both, consumer surplus and producer surplus is maximized and the society achieves efficient allocation of resources. For Instance, in the diagram below, Point E is the equilibrium point as this is the point where forces of demand meet supply. Point P is the equilibrium price, i.e. price level which provides maximum surplus to the consumer and the producer and no one if left unsatisfied.
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P E
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In order to explain how the equilibrium mechanism works and how changes in supply or demand affect the market equilibrium, we will illustrate a real life example of increasing corn supply in the United States that had caused significant changes in the price levels.

Real-life situation: Corn Price Falls as Crop Flourishes

During September, 2014, the corn prices in the United States had fallen to a record four year low levels with farmers and market pundits expecting a bumper crop during the part of year. Before explaining how changes in demand-supply affects the market price, it is important to discuss that market expectations play a significant factor in deciding the equilibrium price levels. For instance, if the market players are expecting a big gamut of supply of a product to arrive at the market, and assuming nil or even fall in the demand pattern of the consumers, the market forces will force the equilibrium price down than the current levels. Similarly, if the demand for a particular product is expected to increase while the supply is assumed to be at similar levels or below than the current levels, this will pull the equilibrium prices above than the current levels.
As for the corn supply in the United States, assuming that ‘P’ is the initial equilibrium price in the corn market where forces of demand and supply meets each other. Now, with all the market forces and participants expecting the supply to be at record levels, this will lead to rightward shift in the supply curve. In this situation, if the farmers try to sell their produce at original equilibrium price, ‘P’, they will experience a shortfall of demand, and a surplus will be created in the market. Hence, in order to sell their produce or to eliminate the supply surplus, they will offer to sell at a lower price. The situation of increasing supply and the process of finding matching demand will continue till new equilibrium price is settled at ‘P2’ while the equilibrium quantity will be ‘Q2’. It is only at this point that society achieves efficient utilization of resources.
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Now, on the opposite side, United States Department of Agriculture said that the reason for record supply expectations is the conducive weather for corn production as mild summers and the right amount of rain at the right time boosted yields. However, if the weather condition turns bad or if the crop growing areas receives early frost, this will once again provide bad for the crop supply and the market may experience shortfall of supply pushing the prices upwards. The diagram below illustrates how a shortfall of supply and increasing demand of corn will result in change in the equilibrium price in the market:
In the above diagram, where P is the equilibrium price and Q is the equilibrium quantity, assuming that weather conditions turns bad resulting in low supply in the market, the supply curve will now pull backward . Now, some consumers who are eager to get the product will offer higher price to suppliers while some may leave the market because of increasing price levels. Thus, this process of increasing demand and decreasing supply will continue till new equilibrium price P2 is fixed by the market forces.

Works Cited

Newman, J. (2014, September 7). Corn Price Falls as Crop Flourishes. Retrieved February 10, 2015, from Wall Street Journal: http://www.wsj.com/articles/corn-price-falls-as-crop-flourishes-1410118926
Parkin, M. (2011). Demand and Supply. In C. Institute, Economics (pp. 14-28). Boston: Custom.