A condition or state, which the economic forces are at a balance, characterizes Economic Equilibrium. This paper outlines the process of market equilibrium and the restoration factor of the invisible hand. The paper discusses the several factors and the relevant laws governing the market demand and market supply, overall market theory, and shortages/surpluses due to market shifts, demonstrated by the housing market of Cupertino, California. The market graphs presented in Appendix A, and the equilibration process is shown step-by-step via the four graphs. The supply and demand changes in the market, but the graphs show the inevitable equilibration process that result in a balance. Law of Demand and its Determinants
The Law of Demand is the statement that customers will buy more of the good as the price decreases and purchase less of a good as the price increases. There are many factors that affect the demand curve, including prices of complementary and substitute goods, personal taste, and income (McConnell, Brue, & Flynn, 2009).
In the market of houses in Cupertino, California, the area is well-known and explored, being in the heart of Silicon Valley. Furthermore, the house locations are convenient and appropriate, and have the best school districts. Thus, the demand for homes in Cupertino tends to stay high.
Elasticity is the concept in economics that measures the responsiveness of one variable in response to another variable. The best measure of this responsiveness is the proportional or percent change in the variables. This gives the most usable results for any type or range of data. Thus, elasticity is the proportional (or percent) change in one variable relative to the proportional change in ...
Law of Supply and its Determinants
The Law of Supply is the governing principle of the market supply. The Law dictates the amount of individual goods at each price level. Producers will provide more of the good as the price increases, and will supply less of a good as the price decreases. There are many factors that affect the supply curve such as prices of inputs, technological advancements, and expectations of the producer for the future (McConnell, Brue, & Flynn, 2009).
In Cupertino, the supply for houses barely fluctuated, only changing mildly in 2008, 2009, and 2010. The properties in this area have a constant supply and high demand with barely changing prices (maximum 3% change).
Efficient Markets Theory
The Efficient Market Theory states that it is not possible to “beat a market” since it is always competent within the means that it provides all possible and relevant information on the market. The Efficiency Market Theory makes sure that investors cannot buy stocks that are devalued or sell stocks that are inflated. The Efficiency Market Theory makes sure that any good being sold in the market is being sold at a fair price (Shiller, 2003).
The relevant theory does not, however, explain the loss of approximately five trillion dollars in the housing market. The stock market prices increase, however the confidence in purchasing a home remain the same until housing prices change.
Surplus and Shortage
The equilibration process begins when a surplus or shortage occurs by natural means in the market. The housing market in Cupertino, California, is suffering from shortages due to the high demand and low supply. The Sales Price Average, $1,182,099, is about double (100.6%) the Asking Price Average in June of 2011. The presence of the multiple customers and the limited amount of property cause the deficit, which by market equilibration becomes corrected.
From an economic perspective users as well as, producers are the essential stakeholders within the equilibrating process. The process encompasses peaks and valleys at various times throughout the process. Enhanced insight of market equilibrium point, supply and demand assists firms in decision-making regarding prices of goods and quantity of goods needed to fulfill the needs of consumers. Understanding this area also helps buyers to make decisions on what and when to purchase goods that satisfy their personal desires.
This paper attempts to prove that the test of a good theory is how well it stands up in the real world. The world is full of problems and some of the greatest problems are found in term of unpredictability. Knowing what will happen as a consequence from doing something now is therefore the essence of good theory because everybody want to be assured that what one has will turn out to be beneficial ...