The market system
The market system refers to the method of allocating scarce resources through the market forces of demand and supply.
Markets consist of buyers (who have demand for a particular good or service) and sellers (suppliers of a particular good or service). Also known as the price mechanism
The market system establishes market equilibrium where demand equals supply
Details for the diagram
As you can see demand and supply for the is the same as it matches the equilibrium price and the equilibrium quantity
Demand and supply in market equilibrium
The demand curve shows that consumers will tend to buy more as the price falls. The supply curve shows that fi rms will tend to offer more for sale as the price rises. When the opposing market forces of demand and supply are in balance, an equilibrium price and quantity are established, where all products offered for sale at that price are bought by consumers.
Market diseuilibrium
Market disequilibrium occurs when the market price is either above or below the equilibrium price. If the price of a product is above the equilibrium price, the product is deemed to be too expensive for consumers, so the quantity supplied will exceed the quantity demanded. To sell off this excess supply, the price must be reduced.
Posibiities in the market system
By contrast, if the price of a product is below the equilibrium price, the product is deemed to be too cheap to attract suffi cient supply, so the quantity demanded will exceed the quantity supplied. To create an incentive to supply more, the price must be raised. Hence, the market system will tend to get rid of market disequilibrium in the long run.