Market Equilibrium, Ebay, and Love …

Today a reader asked me a question. I replied to her via email, but unfortunately the email bounced back:

I just read the essay about the equilibrium in a market. Would you consider ebay as a market where this “ideal state of equilibrium” is achieved? Or are market equilibriums never achieved in real life?

My response:

Hi Christina,

Thanks much for this great question.

The market equilibrium I refer to is really never lastingly achieved in real life.

See, all events that occur on the market are processes. We always act in order to remove one or the other uneasiness in our lives. This is evident in the very fact that we act.

On ebay you constantly find people who prefer owning cash to owning a pair of shoes and you will find people who prefer owning shoes to owning cash. This is the reason why ebay exists in the first place, right? Ebay woudn’t exist if the market had reached the theoretical state of market equilibrium.

What I would say about ebay is that it is a great facilitator of the process of moving toward the theoretical state of market equilibrium more quickly. This targeted state, however, remains in constant flux.

The closest I can think of where a “market equilibrium” of sorts is reached is two people falling in love. When you fall in love, for a brief moment you feel like things can’t get any better. You are above all things and you wish nothing would change. But, as it is with human nature, we fall out of love after some time and that is when the real process of loving can be actively pursued … :)

Let me know if you have any more questions!

Best regards,
Nima

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The Objectives of Economic Policy

It is important to point out again and again the ultimate objectives of economic policy. Economic policy comprises all actions taken by a government‘s bureaucracy that have an impact on market data.

Goods, that is land, factors of production, consumer goods, and media of exchange on planet earth are limited. These scarce goods need to be utilized in a manner so as to satisfy the most urgent needs of the largest number of people at any given point in time. But every individual aims at different objectives and prefers different goods. What he prefers to what and by how much is determined by his value preference.

Prices on the market put into relation and reconcile different individuals’ value preferences, interest rates accomplish the same for differing time preferences. On the market different actors have a natural incentive to attain an optimum utilization of all goods. If there are factors of production that are not being utilized in lines of production where they satisfy the most urgent consumer needs or the needs of the largest number of consumers, opportunities to reap an entrepreneurial profit arise. Entrepreneurs have an incentive to withdraw those factors of production and put them into new lines of production where they produce goods that satisfy more urgent or simply a higher number of consumption demands.

The ultimate objective is to reach the theoretical state of market equilibrium where no further demands need to be satisfied. The market enables individuals and goods to be allocated in a way so as to move toward this market equilibrium. It shall hence be the objective of economic policy to do everything that enables the market to move as quickly as possible and as closely as possible toward the state of market equilibrium.

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