Definition of market disequilibrium

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Price Determination

Market Disequilibrium: Definition

In economics, a market is a mechanism where buyers and sellers interact to determine the price and quantity of goods and services. The price of a commodity is determined by the forces of supply and demand. When the forces of supply and demand are not in equilibrium, a market disequilibrium occurs. This means the quantity demanded and the quantity supplied are not equal.

Market disequilibrium can manifest in two primary ways:

  • Surplus: This occurs when the quantity supplied exceeds the quantity demanded. At the current price, producers are producing more than consumers are willing to buy.
  • Shortage: This occurs when the quantity demanded exceeds the quantity supplied. At the current price, consumers want to buy more than producers are able to offer.

Understanding market disequilibrium is crucial because it signals that the market price is not settling at the equilibrium price. Market forces will then work to restore equilibrium.

Surplus

A surplus leads to downward pressure on prices. Producers, facing unsold goods, will typically lower their prices to attract buyers. This process continues until the quantity supplied equals the quantity demanded, reaching the equilibrium point.

Shortage

A shortage leads to upward pressure on prices. Consumers, unable to find enough of a product at the current price, are willing to pay more. Producers, seeing the opportunity, will raise their prices. This process continues until the quantity supplied equals the quantity demanded, reaching the equilibrium point.

Table Summarizing Market Disequilibrium

Type of Disequilibrium Description Impact on Price Impact on Quantity Market Forces to Restore Equilibrium
Surplus Quantity supplied > Quantity demanded Price tends to fall Quantity tends to increase Producers lower prices; Consumers buy more
Shortage Quantity demanded > Quantity supplied Price tends to rise Quantity tends to decrease Producers raise prices; Consumers buy less

Example: Consider the market for apples. If a particularly good apple harvest results in a large supply of apples, and consumer demand remains the same, a surplus of apples will occur. Apple farmers will likely lower their prices to sell their excess apples. Conversely, if a disease wipes out a significant portion of the apple crop, leading to a shortage, apple prices will rise. Consumers will be willing to pay more for the limited available apples.

Suggested diagram: A graph showing supply and demand curves intersecting at an equilibrium point. A surplus is shown with quantity supplied exceeding quantity demanded at a price above the equilibrium price. A shortage is shown with quantity demanded exceeding quantity supplied at a price below the equilibrium price.