The purpose of this framework is to investigate the changes of international prices of wheat during the period from the year 2000 to 2015. Characteristics of the market economy, such as demand and supply, may be considered on their own, independently from each other only in a theoretical example. In terms of the real economy, they are interconnected through the price mechanism which in turn may have a number of provisions connected. The food crisis speaks true about the fundamental factors that were clearly responsible for keeping the price of cereals at $117 in 2000 and trade factors pushing the prices to $295 per metric ton in 2008.
First consider the situation; there is a product in the market to which the price is set at a level such that the portion of the product cannot be realized. In the graph shown below, it is a region lying above O point between the curves of supply and demand. In this case, the result of high prices is the formation of an excess of the product or available in oversupply. Such a state cannot exist for a long time, since an excess of goods leads to the need to reduce prices.
The following situation: obviously, the high price of goods as a result of competition will inevitably go down, because the price is unsustainable. However, if the price of the product falls too low, there will be a shortage, which will characterize by the excess of demand for the product. It is an area located below O point between the curves of supply and demand shown in the graph below. Now, competition between buyers will raise the price of the product. This price will be increased as long as the market does not have a situation when the quantity of goods which entrepreneurs are willing and able to produce and offer to the market, will be equal to the amount that consumers are willing and able to buy. As a result, there is no shortage or surplus of goods sold at a given price at which equilibrium occurs. The price appears, balancing between supply and demand, which called a market equilibrium price or market clearing price.
The establishment of the equilibrium price in a competitive market takes place under the influence of a change in trends in both demand and supply. The equilibrium market price is set as a cash equivalent to supply and demand. It’s equalized by the impact of the competitive market environment. Clarity, market equilibrium can be demonstrated with the help of the graph below.
Classical supply and demand graph
...(download the rest of the essay above)