In order to understand market disequilibrium, we have to first understand what market equilibrium is. Market equilibrium is simply the situation wherein the quantity of goods and/or services demanded in the market is equal to the supply required, which creates a price that is equal to these two functions. In this case, price, purchases and sales have no impetus to change because sales will not change because sellers maximize profit by selling at the price that is cost-beneficial to the buyer at the exact quantity they require (Png, Lehman 121-122).
In market disequilibrium, things change. In the simplest terms, it is the situation where demand and supply are not equal causing an existence of either a shortage or a surplus. Shortage exists when the quantity demanded exceeds the quantity supplied which, in turn sets the market price below the equilibrium point of the supply and demand. Because of the short supply, buyers will not be able to buy as much as they want at the current prices in the market, prompting sellers to raise the price and buyers taking higher prices to meet their demands.
Surplus, on the other hand, exists when the quantity supplied exceeds the quantity demanded and sets the market price above the equilibrium price. This creates a scenario where the sellers can’t sell all of their products or services since people don’t want to buy as much. To sell them, sellers are motivates to lower the price to create a demand for the product or service (Png-Lehman 122-124).
Manipulating the market is one of the strategies that companies use in order to drive the company upward and, in effect, driving the economy upward with them. Disequilibrium is a result of companies being more competitive and innovative, and, in effect, recreates the whole business and economic landscape to one that is more dynamic. It creates new products and services, which creates a new demand for these innovations. They cause growth and create something more valuable than what they have replaced (Morehouse).
This means that if businesses wanted to grow, they should create disequilibrium in the economy such as optimizing costs through processes, innovating products to create a new demand, and creating jobs. Two of the most commonly used strategies in business are integrated cost leadership-differentiation strategy, which is also a strategy that has a high potential for disequilibrium. This hybrid strategy is used to improve their ability to adapt quickly to changes and learn from them.
Cost leadership enables the company to charge the lowest competitive price while differentiation enables them to charge premium prices because of its features. In this case, buyers are benefited with both product features and low price (Open Learning World). The reason why this has a high potential for initiating market disequilibrium is that it takes on two things that market equilibrium is most concerned about: demand and price. Both the price and the demand curve are affected by the product.
When a product is differentiated, it affects the demands of the consumer in that it creates a need for people to purchase it especially if these are the things the consumers are looking for and at the same time, companies are able to command the price of the products or services. Such demand creation is seen the innovations of budget airlines where it has challenged the conventional airline industry and has created a disequilibrium in the market.
In their entry, demand increased for the differentiated service the airlines offered while keeping prices down. This creates a surplus scenario for price where the product/service attracts people who gravitate toward low cost and differentiated products that push demand up while the supply and demand curves show a scarcity. With the model opening up an opportunity to travel by air to a broader market, it enabled them to gather more consumers who would avail of their services and become successful. Works Cited:
Png, Ivan, and Lehman, Dale. Manegerial Economics. Oxford: Blackwell, 2007. Print Morehouse, Isaac. “Creating Disequilibrium, and Benefiting Society. ” Ludwig von Misses Institute. Misses. org. 8 June 2010. http://mises. org/daily/3442 “Integrated Cost Leadership – Differentiation Strategy. ” Open Learning World. Openlearningworld. com. 8 June 2010. http://www. openlearningworld. com/olw/courses/ books/Business%20Strategies/Business%20Strategy/Integrated%20Cost%20Leadership%20-%20Differentiation%20Strategy. html