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ECO 561 Week 2 Individual Assignment - Market Equilibration Process Paper - A+ Guide!

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RUNNING HEAD: Market Equilibrium Process
Market Equilibrium Process
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Market Equilibration Process Paper 2
Market Equilibration Process
The paper outlines the process of market equilibration and the restoration factor of the
invisible hand. The paper discusses the several factors and the important laws governing the
market demand and market supply, overall market theory, and shortages/surpluses due to market
shifts, demonstrated by the housing market of Cupertino, California. The market graphs are
shown in Appendix A, and the equilibration process is shown step-by-step via the four graphs.
The supply and demand shifts in the market, but the graphs show the inevitable equilibration
process that results in equilibrium.
Law of Demand and its Determinants
The Law of Demand is the statement that customers will purchase more of a good as the
price decreases and purchase less of a good as the price increases. There are many factors that
affect the demand curve, including prices of complementary and substitute goods, personal taste,
and income. In the market of houses in Cupertino, California, the area is well-known and
explored, being in the heart of Silicon Valley. Furthermore, the house locations are convenient
and appropriate, and has the best school districts. Thus, the demand for houses in Cupertino tend
to stay high.
Law of Supply and its Determinants
The Law of Supply is the governing principle of the market supply. The Law dictates the
supply of a certain good at each price level. Producers will supply more of a good as the price
increases, and will supply less of a good as the price decreases. There are many factors that affect
the supply curve such as prices of inputs, technological advancements, and expectations of the
producer for the future. In Cupertino, the supply for houses barely fluctuated, only changing

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Market Equilibration Process Paper 3
mildly in 2008, 2009, and 2010. The property in this area has a constant supply, and a high
demand with barely changing prices (maximum 3% change).
Efficient Markets Theory
The Efficient Market Theory states that it is not possible to “beat a market” since the
market is always efficient in the sense that is provides all possible and relevant information on a
market. The Efficiency Market Theory makes sure that investors cannot buy stocks that are
devalued or sell stocks that are inflated. The Efficiency Market Theory makes sure that any good
being sold in a market is being sold at the fair price. The Efficiency Market Theory does not,
however, explain the loss of approximately five trillion dollars in the housing market. The stock
market prices increase, however the confidence in purchasing a home remain the same until
housing prices change.
Surplus and Shortage
The equilibration process begins when a surplus or a shortage occurs by natural means in
a market. The housing market in Cupertino, California, is suffering from shortages due to the
high demand and low supply. The Sales Price Average, $1,182,099, is about double (100.6%) the
Asking Price Average in June of 2011. The presence of the multiple customers and the limited
amount of property causes the shortage, which by market equilibration becomes corrected.

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