Equilibrium Process Essay

1139 words - 5 pages

Market Equilibration Process
Gregory Ivie
University of Phoenix
Economics
ECO/561
John Lindvall
May 31, 2013
Market Equilibration Process Paper
This paper contains a brief explanation of the effects on the market equilibration process in the commercial trucking industry after the Motor Carrier Act of 1980 was signed by former president Jimmy Carter. It also lists some basic examples of how the law of demand, the basic determinants of demand, change in Demand, law of supply, the determinants of supply, the efficient markets theory and how a surplus and a shortage occurs ...view middle of the document...

This was a real barrier to entry and a strong anti-trust aspect in the industry. Limited competition in this aspect kept prices high and shippers in control. Companies were not allowed to drive through other routes, and it often added on hundreds of unnecessary miles (Moore, 1993). Prior to the signing of the new act in 1980 only 18,000 truckers had licenses to operate and transport routes were strictly regulated combined with very expensive freight rates.
Effects of the Law of Demand
The Department of Transportation (DOT) estimates the act saved 10 billion annually, whereas other estimations are around 20 billion and more. After the enactment of the Motor Carriers Act of 1980 45,500 truckers eventually obtained licenses (Moore, 1995). With the act came a drop in the cost of storing and maintaining inventory. Truckers had more flexibility in transporting and could bring in supplies more efficiently (Moore, 1993).  
An increase in operators quickly made the trucking industry very competitive. Better technology and more innovative ideas fostered competition. It was not uncommon to see customized contracts between carriers and shippers, which under old regulation would have been unheard of. As a result, better prices for the consumer were found across the market (Schott, 1997). As the Law of Demand dictates the decrease in operating expenses and elimination of the barriers to entry resulted in the increase in the need for transport services as the demand curve shifted to the right. The economy also expanded as did the basic determinants of demand such as (1) consumers ‘tastes (preferences), (2) the number of buyers in the market, (3) consumers’ incomes, (4) the prices of related goods, and (5) consumer expectations. These changes initially created a shortage of trucking companies and drivers and caused the industry’s supply and demand curve to be out of equilibrium.



Effect of the Law of supply
The basic determinants of supply are (1) resource prices, (2) technology, (3) taxes and subsidies, (4) prices of other goods, (5) producer expectations, and (6) the number of sellers in the market.
The shortage in the supply of drivers and trucking companies caused a back log of inventories that needed shipping while other determinants of demand continued as predicted the laws of supply created ever-growing unshipped inventories at each possible price. As more trucking companies entered the industry and more drivers became licensed the supply and demand curve shifted to a lower equilibrium price for the excess need for transport services.
Efficient Markets Theory
The deregulation of the trucking industry was originally meant to lower the shipping cost and the barriers to entry it also served to eliminate the unfair...

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