Market Equilibrium Process

In: Business and Management

Submitted By misslana
Words 543
Pages 3
Market Equilibrium Process
Marlana Sisson
Economics
Maria Hamideh Ramjerdi
April 13, 2014

The basis of any economy is supply and demand. Consumers have a need, or demand, for goods and services. Producers produce and supply those goods and services to the consumers in the marketplace of the economy. Producers must find the right price to sell their goods and must also produce the quantity demanded by consumers. If producers produce too much or too little of a product, the will create a shortage or surplus in the market. A shortage occurs when producers do not produce enough of a good or service to meet consumer demand. A surplus occurs when producers produce too much of a good or service in excess of consumer demand (Ehrenberg & Smith, 2003). Country XYZ is the leading exporter for coffee beans in the world. Recently, their government has undergone some reform and has placed an embargo on the country’s coffee beans export. If all other remain constant, the law of demand suggests that an increase in price will result in a decrease in demand for the product (McConnell, Brue & Flynn, 2009). County XYZ was producing at market equilibrium at point ME (shown in Diagram A). Now that an embargo has been placed on coffee beans, they will become more expensive to export. This increase causes the producers of the coffee beans to raise their price from the initial price, P, to the new price, P’, and the supply to shift from SS to SS’ as shown in Diagram A. This new price, P’, causes the original quantity demanded to decrease and shift inward from Q to Q’ (the new quantity demanded). If the producers of the coffee beans continue to produce the supply at the original amount, Q, this will result in a surplus of coffee beans in the market (shown in Diagram A). The intersection of the new price point, P’, and the new quantity demanded, Q’, become the new…...

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