Why and how disequilibrium persist in the market economy?
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Disequilibrium occurs when the markets fail to clear and find their final equilibrium point. Disequilibrium could occur if the price was below the market equilibrium price causing demand to be greater than supply, and therefore causing a shortage. Disequilibrium can occur due to factors such as government controls, non-profit maximising decisions and ‘sticky’ prices.
A good example could be tickets for a football stadium. With a strictly limited supply (55,000). Demand for big games may far exceed supply. The market equilibrium price would be £77. But, the football club may decide to set prices at £40. This causes 10,000 to be unable to go to the game at that price.
Football clubs are likely to avoid setting a market clearing price (£77) because they don’t want to be accused of being ‘elitist and unfair’. It is important for clubs to create good relations with the local community. Also, with sport, the profit motive is not the only factor behind the business.
Therefore, they may keep prices well below the market clearing price (£40). (where demand is greater than supply) The problem is that many fans who want to watch the game can’t get in. It may lead to a black market where some resell tickets to those willing to pay a much higher price.
There could be a disequilibrium through a maximum price. – which is a government control to set prices below the equilibrium. (e.g. renting)
What causes disequilibrium?
Why do some markets lead to disequilibrium
Sticky prices – Firms may be committed to keeping prices the same for a whole year. Therefore, if there is a seasonal increase in demand, you get a shortage because the firm doesn’t want to keep changing prices – especially when demand is quite volatile. There are menu costs in changing prices, but also they can annoy customers by frequently putting up prices.
Social factors – Sometimes firms may keep prices deliberately low because they feel they have a commitment to the community – e.g. landlords not increasing rent, football clubs not increasing ticket prices.
Non-profit maximising decisions. Economics assumes that individuals are rational and seeking to maximise utility. However, in the real world, other factors are at work. For example, the taxi operator Uber uses ‘surge pricing’ – this allows the price to rise with heavy demand – encouraging more drivers to work. However, this can mean that in natural disasters, it looks like Uber is profiting from ‘unfairly high’ prices. Uber has tweaked its algorithms to over-ride these equilibrium prices.
Government controls – e.g. maximum or minimum prices or government regulating prices, e.g. train tickets limited by rail regulators.
A good example could be tickets for a football stadium. With a strictly limited supply (55,000). Demand for big games may far exceed supply. The market equilibrium price would be £77. But, the football club may decide to set prices at £40. This causes 10,000 to be unable to go to the game at that price.
Football clubs are likely to avoid setting a market clearing price (£77) because they don’t want to be accused of being ‘elitist and unfair’. It is important for clubs to create good relations with the local community. Also, with sport, the profit motive is not the only factor behind the business.
Therefore, they may keep prices well below the market clearing price (£40). (where demand is greater than supply) The problem is that many fans who want to watch the game can’t get in. It may lead to a black market where some resell tickets to those willing to pay a much higher price.
There could be a disequilibrium through a maximum price. – which is a government control to set prices below the equilibrium. (e.g. renting)
What causes disequilibrium?
Why do some markets lead to disequilibrium
Sticky prices – Firms may be committed to keeping prices the same for a whole year. Therefore, if there is a seasonal increase in demand, you get a shortage because the firm doesn’t want to keep changing prices – especially when demand is quite volatile. There are menu costs in changing prices, but also they can annoy customers by frequently putting up prices.
Social factors – Sometimes firms may keep prices deliberately low because they feel they have a commitment to the community – e.g. landlords not increasing rent, football clubs not increasing ticket prices.
Non-profit maximising decisions. Economics assumes that individuals are rational and seeking to maximise utility. However, in the real world, other factors are at work. For example, the taxi operator Uber uses ‘surge pricing’ – this allows the price to rise with heavy demand – encouraging more drivers to work. However, this can mean that in natural disasters, it looks like Uber is profiting from ‘unfairly high’ prices. Uber has tweaked its algorithms to over-ride these equilibrium prices.
Government controls – e.g. maximum or minimum prices or government regulating prices, e.g. train tickets limited by rail regulators.
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