9.4G: Market-Oriented Theories
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Market-oriented theories of inequality argue that supply and demand will regulate prices and wages and stabilize inequality.
Learning Objectives
- Evaluate the concept of the market-oriented theory of inequality
Key Points
- When supply meets demand, prices reach a state of equilibrium and cease fluctuating.
- According to market-oriented theories, over time the low wages earned by agricultural laborers will induce more people to learn other skills, thus reducing the pool of agricultural laborers.
- The supply and demand model is commonly applied to wages, in the market for labor. The typical roles of supplier and consumer are reversed.
Key Terms
- supply and demand : An economic model of price determination in a market based on the relative scarcity or abundance of goods and services.
- equilibrium : In economics, the point at which supply equals demand and prices cease fluctuating.
- free market : Any economic market in which trade is unregulated; an economic system free from government intervention.
Market-oriented theories of inequality are focused on the laws of the free market. The free market refers to a capitalist economic order in which prices are set based on competition. In a free market, prices are supposed to be regulated by the law of supply and demand. According to supply and demand, if a produce or service is scarce but desired by many, it will fetch a high price. Conversely, if a product or service is readily available and desired by few, it will fetch a low price. When the supply of a product exactly meets the demand for it, the price reaches a state of equilibrium and no longer fluctuates.
The model is commonly applied to wages, in the market for labor. The typical roles of supplier and consumer are reversed. The suppliers are individuals, who try to sell (supply) their labor for the highest price. The consumers of labors are businesses, which try to buy (demand) the type of labor they need at the lowest price. As populations increase, wages fall for any given unskilled or skilled labor supply. Conversely, wages tend to go up with a decrease in population. When demand exceeds supply, suppliers can raise the price, but when supply exceeds demand, suppliers will have to decrease the price in order to make sales. Consumers who can afford the higher prices may still buy, but others may forgo the purchase altogether, demand a better price, buy a similar item, or shop elsewhere. As the price rises, suppliers may also choose to increase production, or more suppliers may enter the business.
Considering inequality, market-oriented theories claim that if left to the free-market, all products and services will reach equilibrium, and price stability will reduce inequality. For example, in countries with huge pools of unskilled agricultural laborers but limited agricultural land, agricultural land is very poorly compensated. According to market-oriented theories, over time the low wages earned by agricultural laborers will induce more people to learn other skills, thus reducing the pool of agricultural laborers. With less supply and stable demand, the wage for agricultural labor will rise to a sustainable level. Thus, the status of agricultural laborers will rise, and inequality will be reduced. Generally, market-oriented theories hold that when supply of labor and goods meets demand, the economic order will reach equilibrium, and inequality will either be non-existent or will be stable.