Market force

A market force is a factor that has some ability to affect change in a market. Market forces determine the price and quantity of a good or service in a market.[1] Market forces occur naturally in a free market economy and are controlled by government intervention.

An example of market force acting is when the price of crude oil increases when there are shortages in the supply. These shortages can happen for a number of reasons. The demand for crude oil could go up suddenly, or a disruption in the supply chain from a natural disaster like a hurricane (which happened in the United States when hurricane Katrina interrupted oil production in 2005[2]. Additionally, an armed conflict (like a war) or a damaged pipeline can cause shortages.[3] When these shortages occur, they become market forces. The demand outstrips supply which causes the prices to rise as the crude oil is less available and therefore consumers will be willing to pay more.

Market Forces in Action

Figure 1. The changes resulting from a supply disruption in the market for crude oil.

Assume that Country A gets all of its crude oil form Country B, a war breaks out in the eastern part of Country B where 30% of its oil production occurs. This war prevents oil from being produced from that region so Country B can only export the remaining 70% (of its production) of crude oil from the western part of their country.

  • At Point A the market is in equilibrium, the supply matches the demand and the price P1 and quantity Q1 reflect this equilibrium.
  • The decrease in exports from Country A to Country B means that the quantity supplied falls from Q1 to Q2. The red arrow denotes this decrease in the quantity supplied.
  • The decrease in the quantity supplied means there is less crude oil than there is demand for. Because the demand remains high, the crude oil is comparatively scarce.
  • The scarcity of crude oil in the market of Country A means that it is valued more by consumers and that they are willing to pay more to get it. Their willingness to pay the higher price is shown on the Y-axis by the increase from P1 to P2. The green arrow denotes this increase in the price per unit of crude oil.
  • Point B reflects the higher price and lower quantity resulting from this disruption in supply.

Assume the war ends relatively soon, Country B will be able to export oil from the eastern part of their country again. This will result in an increase in the supply to the market and a return to the equilibrium where supply meets demand.

See Also

References

  1. J.Black, N. Hashimzade, and G. Myles. (2009) "Market Economy." [Online], Available: http://www.oxfordreference.com/view/10.1093/acref/9780199237043.001.0001/acref-9780199237043-e-1924?rskey=eaSXjc&result=1, 2009 [Aug 10, 2016]
  2. See for example: http://www.nbcnews.com/id/9146363/ns/business-local_business/t/pump-prices-jump-across-us-after-katrina/#.V79r0KJvmYY accessed August 25th, 2016.
  3. A. Goolsbee, S. Levitt and C. Syverson. Microeconomics. New York: Worth Publishers, 2013, pp. 15.

Authors and Editors

Lyndon G., Celeste Pomerantz, Jason Donev
Last updated: September 17, 2016
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