Market Forces

Market forces in the economy are the (quick, less rapid or even not at all) creation of an equilibrium price for a good or for a service, when there is a given relationship between supply and demand.

Example for market forces

When we imagine an economy in which paper is 10 times more expensive than we are used to, the demand for paper in that economy will be small. But in such a situation, assuming that all other conditions in the economy remain the same, it is very lucrative to start a new paper factory to sell paper. The demand is then smaller than the supply. In that situation, a lot of paper remains unsold.

The market price is too high to clear the market. In order to be able to sell the paper anyway, the paper manufacturers will have to lower the price. Conversely, if paper is very cheap, demand will increase, but paper mills, suppliers, bankrupt. The demand is now greater than the supply and there is a shortage of paper, as a result of which the price will rise.

Such adjustment trajectories to a market equilibrium can take quite a long time depending on the type of product. It will be clear that, for example, a new (paper) factory will not be built in one day. If at any time the market price equals the equilibrium price, the market is in balance. This will remain so until the market becomes unbalanced again due to an exogenous shock. Supply and demand are balanced against the most favorable price / quality ratio.

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