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Market Equilibrium:

Understanding how market equilibrium is maintained is essential for business managers. As a manager, it is important to understand how economic principles, and specifically supply and demand, are a part of your everyday business decisions.

Explain the market equilibrating process and compare the demand for food with the demand for Starbuck's coffee. Include academic research to support your ideas.

Consider the following components in your explanation:
- Law of demand and the determinants of demand
- Law of supply and the determinants of supply
- Efficient markets theory
- Surplus and shortage

Create graphs illustrating the equilibrating process in price relation to the shift in supply and demand.

Solution Preview

Step 1
Market equilibrium means that market price is set when the amount of goods/services demanded by the buyers is equal to the amount of goods or service produced by sellers. This price is called the market clearing price. In market equilibrium the amount supplied is equal to the amount demanded. At equilibrium no one on the demand side or the supply side has any incentive to demand more or less at the equilibrium price. This equilibrium is reached through interactions in the market. If the price is above equilibrium, supply will exceed demand and will put downward pressure on price so that it returns to the equilibrium. Similarly, if the price is below the equilibrium point there will be shortage of supply and there will be pressure to increase the price till it reaches the equilibrium point.

Step 2
When we compare the demand for food with the demand for Starbucks coffee, we should consider the responsiveness of food and Starbucks coffee to changes in price. This responsiveness is called elasticity of the quantity demanded of the good to a change in its price. Food is a necessity and it has a lower responsiveness to changes in price, but Starbucks coffee is not a necessity and so is responsive to changes in price. In other words food has a low elasticity of demand but Starbucks coffee has a high elasticity of demand.

Step 3
The law of demand says that higher the prices, the lower the quantity demanded and lower the prices, the higher the ...

Solution Summary

This solution explains the Market Equilibrium Process. The sources used are also included in the solution.

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