Market Equilibrium Process

Market Equilibrium Process

ECO/561

September 22, 2014

Consumers and producers react differently to price changes. Higher prices cause reduction in demand while increase the supply. On the other hand, lower prices cause an increase in demand and decrease in the supply. However, it is not always true because there are some other factors that have a direct effect on the market equilibrium. Terrorism is one important factor that had a great impact on aviation after the terrorist attack on September 11, 2011 (economics online).

After the terrorist attack on the world trade centers, the aviation companies suffered a big loss. US passenger traffic measured by revenue passenger kilometers declined 5.9% in 2001 compared to 2000 and 1.5% compared with 2002 (Taylor, N.A). US Airline revenues fell from $130.2 billion in 2000 to $107.1 in 2002 (Taylor, N.A).  

The industry of aviation was hindered badly based on the demand, supply, surplus and shortages in this industry.

Law of Demand

The law of demand states that the quantity demanded for a good rises as the price falls. In other words, this indicates that the quantity demanded and prices are “inversely related” (Moffat, N.A). In this case study, the law of demand has a big effect because the terrorist attack on September 11, 2011 occurred on an airplane. The demand on using airplanes was very low after the attack that caused a big loss for the airlines industry.

Law of Supply

The law of supply states that the quantity of a good supplied rises as the market price rises, and falls as the price falls (Al Ehrbar, N.A). In this case study, the law of supply does not apply because only demand was affected.

The Efficient Markets Theory

The efficient market theory states that the stock market reacts very quickly to new information, so at any given time the market contains the sum of all investors’ view of the market.

The efficient markets theory has an important role in our case study because after the media announcement of the attack the airlines stocks went down (The efficient market theory).

Surplus and Shortage

When the quantity of a good or service exceeds the demand for that particular good at the price of which the producers would wish to sell, this is known as surpluses.

When the supply produced is below that of the quantity being demanded by the consumers, this is known as a shortage. This disparity implies that the current market equilibrium at a given price is unfit for the current supply and demand relationship (Market Equilibrium).

The surplus played a role in this case study contrary to shortage because when the terrorist attack first happened, the airlines did not cancel their flights while a lot of people canceled their booking. Therefore, the number of flights exceeded the number of passengers.