Macroeconomics Essay

1620 WordsMar 15, 20147 Pages
What is the mechanism by which the “invisible hand” pushes markets to equilibrium? In a free market economy the mechanism that pushes the markets to equilibrium is the price system. As firms and households interact in the market place primarily interested in their own well-being, prices become the instrument both players use to gauge the goods and services they demand and supply. Buyers determine how much of certain goods or services they will demand based on the prices of such and that same price will ultimately help the seller on deciding how much to supply. However, other factors will also ultimately affect the price and/or demand in the market place. Prices are not only affected by the overall demand, they are affected by the cost of producing such goods and services, like the cost of labor, raw materials, and energy. On the other hand, the buyer’s demand is not only affected by the price of goods and services but also buyer’s taste, trend, change of buyer’s income and the cost of related goods and services. An example of this is the US auto market. American’s love affair with SUVs in the 1990’s and early 2000’s made the demand for these vehicles skyrocket. The trend was “the bigger, the better” and the relative low cost of fuel helped to fuel the production lines at the auto manufacturing plants. In recent years, pushed by the high cost of fuel and the new trend to be “green” the overall consumer demand for SUVs has dropped favoring smaller, more fuel efficient and environmentally friendly vehicles. But even when “green” is the new cool between consumers, many of us still choose high efficiency low emissions gas fuel vehicles or sometimes hybrids, because the high cost of 100% electric powered vehicles. Explain the two main causes of market failure and give an example of each. Although the “invisible hand” most of the time can lead to desirable market

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