Market Equilibration Process

It is often challenging to appreciate this process since retailers sell the sales prices of most manufactured commodities. In such a situation, either buyers accept the price or they do not purchase the commodities (Stackelberg, 2011). If an individual consumer in a mall haggles over the price, there is likely to be no reaction from the supplier. Conversely, if all potential buyers haggle and reject the set price, then sellers react quickly to reduce price. In this way, jointly, buyers have influence over prices. A rational seller would engage in gathering as much market information as possible in an attempt to set a price that attains a given number of sales at the outset (Townsend, 2002).

Effective flow of&nbsp.information&nbsp.between sellers and buyers is essential for an effective working of markets. Equilibrium price is also known as&nbsp.market clearing price&nbsp.as at this price consumers buy the exact quantity that producers take to market with no surplus left over. This is efficient as there is neither wasted output nor excess supply or shortage of commodities in the market. This is a fundamental feature of the price mechanism, and one of its important benefits (Mankiw, 2007).

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As shown from the above schedule, the market will be in equilibrium at a price of $3 per soft drink. At this price, the supply of the drink equals the demand, and the market clears. There are 300 drinks offered by suppliers at that price and consumers purchase the whole 300. There will be no excess supply or demand at $3.

At a higher price than the equilibrium price, the demand for the soft drink will be less than 300, but the supply will be more than 300 and there will be an excess of supply in the short run. Graphically, the supply curve extends outwards while the demand curve contracts inwards. These movements along the supply and demand curves are a response to price changes (Mankiw, 2007).

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