Market Equilibration Process Paper

Market Equilibration Process Paper

Equilibration occurs within markets and economies regularly. The invisible hand assists with this process more often than not. This paper will discuss an example of a government’s attempts at equilibration, the laws of supply and demand, determinants of supply and demand, efficient market theory, and surplus and shortage.

Indonesia has the fourth largest populace in the world, with a population increase of 1.5% a year. Indonesia’s main staple is rice, and in 1997, a combination of severe weather occurrences, a financial crash and rodent overpopulation caused a shortage of the country’s main export and staple. Rice is a crucial product to Indonesia’s nutritional needs and its rituals (Mcgraw Hill & Ryerson, 2013). The shortage led to a disruption in the supply of rice for the population of Indonesia, and caused the price of rice to inflate so high that more than 25% of the country’s inhabitants could not afford to buy enough rice to meet their needs. The government tried to intervene by introducing subsidized rice to the market place. These programs did not achieve the necessary effect, and the price of rice continued to rise. Eventually the government had to resort to asking for assistance from other countries and take measures to increase the supply of rice.

Because of the importance of rice to the economy of Indonesia, quantity demanded did not change with the rising price. Even though much of the population could not afford the product, the necessity for the product did not change. The government imported rice to introduce it to the marketplace in an effort to bring about economic equilibrium. This did cause a shift in the supply curve, but because the price was still extremely high for rice, the shift the government caused was not as large as the shift caused by the weather, rodents and financial crash (Mcgraw Hill & Ryerson, 2013).

The law of demand states that, all other things being equal, there will be less demand for higher priced goods and services ("Us Economy", 2013). This means that as prices for a good rise, the demand for the good should decrease. This was not the case for Indonesia’s rice shortage because of the necessity of the product. There are determinants of demand. Determinants of demand typically determine the changes in demand. The five determinants of demand are:

1. Price of the good or service.

2. Prices of related goods or services. These are either complementary, which are things that are usually bought along with the product in demand. They could also be substitutes for the product in demand.

3. Income of those with the demand.

4. Tastes or preferences of those with the demand.

5. Expectations. These are usually about whether the price will