Market Forces

The uninterrupted operation of supply and demand to determine market outcomes. Ideally, the freedom to buy and sell is supposed to determine market prices and desired output or efficient allocation of scarce resources.

Market forces may produce expected outcomes when certain conditions prevail. For example, consumers must be fully aware of competing prices, the market must be competitive, there must be diverse producers and substitutable products, and no producer must exercise a considerable sway over prices and the quantity that will be made available in the market. These are some of the necessary conditions for a perfectly competitive market structure, which is usually used as a model of an efficient market in economics.

The assumptions make it feasible to analyze consumer reaction to prices and producer reaction to consumption and costs. If prices are too high, consumers will generally indicate their unwillingness to buy at a higher price relative to a lower price. Of course, this also presupposes that the products in question are not necessities and that substitutes are available. At prices that are higher than what the market will permit, there will be an excess of supply of products. If all things remain unchanged, excess supply will force prices to fall in order to induce increased consumption or demand.

Conversely, if prices are too low, there will be an excess of demand. If all things remain unchanged, excess demand will bid prices up. Consumer and producer perception of unacceptable higher and lower prices will force the market participants to buy and sell goods, assets, and services at the efficient price—the price at which producers will be willing to produce the quantities that are wanted by buyers, thereby using society's resources efficiently.

[Page 306]In reality, the assumptions or conditions for free market forces to operate are not always evident, partly because of shocks, corruption, collusion, asymmetric information, and deception in the marketplace.