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WANTS: This is often thought of as a psychological desire which makes life just a little more enjoyable, but which is not physiological necessary to life. You need oxygen, but you want a hot fudge sundae. Satisfaction is achieved by fulfilling wants.

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MARKET ADJUSTMENT:

The economic analysis of changes in market equilibrium caused by changes in any of the five demand determinants and/or the five supply determinants. Market adjustment comes in one of eight varieties, given that the two curves comprising the market (demand curve and supply curve) can either increase or decrease, individually or simultaneously. Four adjustments involve a shift of EITHER the demand curve OR the supply curve. The other four adjustments involve shifts of BOTH the demand curve AND the supply curve.
A primary use of the market model is the comparative static analysis of market adjustments. Market equilibrium can be shocked due to a change in one of five demand determinants and/or one of the five supply determinants. When shocked, the market adjusts to a new equilibrium price and quantity. The process of moving from one equilibrium to another is market adjustment.

ShiftQuantity
Change
Price
Change
Single Shift
Demand IncreaseIncreaseIncrease
Demand DecreaseDecreaseDecrease
Supply IncreaseIncreaseDecrease
Supply DecreaseDecreaseIncrease
Double Shifts
Demand and
Supply Increase
IncreaseIndeterminant
Demand and
Supply Decrease
DecreaseIndeterminant
Demand Increase
and Supply Decrease
IndeterminantIncrease
Demand Decrease
and Supply Increase
IndeterminantDecrease
The table to the right summarizes the eight alternative market adjustments. The first four listed involve a shift in EITHER the demand curve OR the supply curve. The second four involve shifts in BOTH the demand curve AND the supply curve.

Like Moving to a New House

Market adjustment is a lot like moving from one residence, house, or apartment to another. Consider, for example, the relocation of Duncan Thurly when he left home as a youth in search of fame and fortune. It was an excruciatingly hot August morning when several gullible, but well-meaning friends showed up to assist Duncan's relocation. They haphazardly packed a U-Rent-It truck. Pizza was served. Someone dropped a stereo. Profanity was involved.

In the end, it was goodbye familiar, comfortable home. So long old friends. Hello new, different place. A residential relocation such as this, even without profanity, tends to be very disruptive. Duncan's OLD, comfortable lifestyle was thrown out of whack as he left his family, friends, and familiar settings. But he adjusted. He eventually established a NEW, comfortable lifestyle.

Markets adjustments are similar. In the same way that people are comfortable in their old familiar homes, markets are accustomed to their old familiar equilibrium price and quantity. Then moving day comes. The market is disrupted. Well-meaning friends pack up the equilibrium price and quantity as they depart to a new location.

The analysis of market adjustments is THE prime analytical use of the market model. Like Duncan's well-meaning friends used screw drivers, wrenches, and crowbars as tools to disassemble (and move) his bed, economists use the market as a tool to disassemble (and understand) the economic world.

The Market Adjusts

If the truth be known, markets in the real world seldom remain at nice, comfortable equilibrium prices and quantities. They move. Prices change. Quantities change. To understand these real world changes, it is important to see how the market model adjusts when it is shocked by changing determinants.

Consider three questions that spring forth from this moving analogy.

  • First, what causes the move? Many reasons might have motivated Duncan's residential relocation. Perhaps he had a new job. Perhaps a tornado, flood, or other natural disaster forced him to relocate. Perhaps he just did not like the weather where he was living. Perhaps he just did not like his neighbors. Perhaps he was merely looking for a really good hot fudge sundae. Much like people move for many reasons, so too do markets. The specific reasons are the five demand determinants and the five supply determinants.

  • Second, what are the consequences? The short term consequence of Duncan's residential relocation was a disrupted life that was thrown out of whack. In the long term, however, he adjusted to the new setting. He grew use to the new house, new neighborhood, new job, new shopping, new schools, and new friends. The same goes for a market. While it is temporarily disrupted, it reaches a new equilibrium, at a new price and quantity.

  • Third, is the move good or bad? Did Duncan enjoy his new lifestyle more than the old? Are his neighbors friendlier? Does his job pay more? Has the weather improved? Did he find a better hot fudge sundae? The analysis of market adjustments involves comparable questions. Has the disruption increased or decreased quantity? Does the new equilibrium have a higher or lower price?

Six Adjustment Steps

The comparative static analysis of the market adjustment process involves six basic steps.
  1. A determinant changes. It could be demand determinant, a supply determinant, or both. A determinant change ALWAYS starts the market adjustment process. In fact, the market adjustment process is essentially the analysis of how a determinant change affects the market.

  2. The determinant change causes a curve to shift. A demand determinant causes a shift in the demand curve and a supply determinant causes a shift in the supply curve. These shifts are what graphically throw the market out of balance.

  3. The shifted curve disrupts the market equilibrium, causing either a shortage or a surplus. An increase in demand or a decrease in supply create a shortage. A decrease in demand or an increase in supply create a surplus. The shortage or surplus imbalance emerges because the original equilibrium price is unchanged, at least for the time being.

  4. The market imbalance causes the price to change. A shortage causes the price to rise as buyers bid up the price. A surplus causes the price to fall as sellers bid down the price.

  5. The change in price causes changes in both quantities demanded and supplied. The price change generally has an intended effect and an unintended effect. With a shortage, buyers bid up the price with the intention of increasing the quantity supplied. But the higher price also has the unintended effect of decreasing the quantity demanded. With a surplus, sellers bid down the price with the intention of increasing the quantity demanded. But the lower price also has the unintended effect of decreasing the quantity supplied.

  6. Changes in the quantities demanded and supplied both act to eliminate the market imbalance. The price continues to change as long as the market is out of balance with a shortage or surplus.

<= MARKETMARKET CLEARING =>


Recommended Citation:

MARKET ADJUSTMENT, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: June 23, 2018].


Check Out These Related Terms...

     | demand shock | supply shock | demand increase | demand decrease | supply increase | supply decrease | demand and supply increase | demand and supply decrease | demand increase and supply decrease | demand decrease and supply increase |


Or For A Little Background...

     | comparative statics | ceteris paribus | economic analysis | graphical analysis | variables | demand curve | supply curve | demand determinants | supply determinants | change in demand | change in supply | change in quantity demanded | change in quantity supplied |


And For Further Study...

     | market equilibrium, graphical analysis | market equilibrium, numerical analysis | shortage | surplus | price ceiling | price floor | elasticity | utility analysis | short-run production analysis |


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