Question

“A key advantage of a market-based system that focuses on stock price maximization is that it is self-correcting”. Explain what we mean by “self-correcting” and give an example.

Answer 1

SELF CORRECTION MARKET refers to the automatic process of the adjustment in the situation of the market. Whenever the market goes into disequilibrium it takes the measures by it self to adjust from disequilibrium to equilibrium. This is known as the self-correction process. The demand and supply of the goods get changed and so in response the market price either increases or decreases. The low supply will create a shortage or a high supply may create a surplus to restore the balance between quantity demanded and quantity supplied.

Suppose, if the disequilibrim occurs and the demand increase the prices will fall short this will lead to curtailing the supply by manufacturers which will again impact the price and help them to again come in the equilibrium position.