Market Equilibrium Of Cryptocurrencies || How Determined

in LeoFinance4 years ago

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Equilibrium Price & Quantity


According to the classical theories of economics, there is only one price at which the demanded quantity is equal to the supplied quantity.

Demand curve & supply curve intersect at that point which is known as Equilibrium Point (e).

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Price at the intersection is Equilibrium Price (Pe) & quantity demanded & supplied at this price is Equilibrium Quantity (Qe).


Market Shortage


If the actual market price is below the equilibrium price, buyers demand more of the commodity than the quantity supplied by sellers. Excess demand, that is, shortage is experienced in the market.

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As sellers notice that the commodity offered for sale is running out & buyers still want more, they start to raise the price.

Buyers respond to rising prices by decreasing demanded quantities, while sellers willing to sell increases.

The process continues as long as excess demand is present in the market & finally the equilibrium price is attained.


Market Surplus


In opposite situation, if the actual market price is above the equilibrium price, causing excess supply (surplus) in the market.

The quantity supplied for sale is larger than the quantity demanded by the buyers, and the commodity is in surplus.

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Then the sellers realize that they are unable to sell all the produced quantities. Therefore they start to decrease the price & buyers respond to that by increasing demand.

The process goes on until the equilibrium price is reached & the surplus disappears.


Market Automatism


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Therefore, non-equilibrium prices create competition among consumers or producers, initiating an automatic adjustment of the price towards the equilibrium.

The final outcome of this automatic adjustment is the disappearance of excess demand or excess supply, and the market attains the equilibrium.

The equilibrium price is also called market clearing price, because it clears both surpluses and shortages from the market.

This self-regulating feature of markets is called market automatism, or as Adam Smith called it the ‘invisible hand’.

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Is There Any Invisible Hand On Cryptocurrency Market?


There is no perfect market competition in the world, as we may term some markets Nearly Perfect.

It happens due to the lack of features in real world that’s mentioned on the assumptions.

Whenever we formulate any economic theories, we have to consider an ideal condition. But reality doesn’t match with the assumptions.

In case of cryptocurrencies, the demand and supply tends to nearly parallel as follows:

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If we observe the data of the demand and supply of BTC for last one year, the linear trend line is nearly parallel as follows:

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As they are almost parallel in nature, they don’t intersect each other. So it is not possible to intersect each other. Therefor you will not get any equilibrium point from this graph.

Now the question arises, what should be rational price?

It will be selected by the potentiality & strength of the cryptocurrencies. I will discuss it later.

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Very informative post

Thanks a lot