Price Determination: Interpreting Disequilibrium with Demand and Supply Schedules

This section explores how prices are determined in markets, focusing on the concepts of equilibrium and disequilibrium. We will use demand and supply schedules to illustrate these concepts and interpret the resulting market conditions.

Understanding Equilibrium

Equilibrium occurs when the quantity demanded by consumers equals the quantity supplied by producers. At equilibrium, the market price is stable, and there is no pressure for the price to change.

Graphically, equilibrium is represented by the intersection of the demand and supply curves.

Disequilibrium: Surpluses and Shortages

Disequilibrium arises when the quantity demanded and the quantity supplied are not equal. This leads to either a surplus or a shortage.

A surplus occurs when the quantity supplied exceeds the quantity demanded. This results in excess inventory and downward pressure on prices.

A shortage occurs when the quantity demanded exceeds the quantity supplied. This leads to unmet demand and upward pressure on prices.

Using Demand and Supply Schedules

Demand and supply schedules show the relationship between price and quantity demanded/supplied. We can use these schedules to analyze different market conditions.

Example: Analyzing a Market with Disequilibrium

Consider the market for apples. The following demand and supply schedules show different price levels and the corresponding quantities demanded and supplied:

Price per kg ($)	Quantity Demanded (kg)	Quantity Supplied (kg)
$2.00	100	50
$3.00	80	70
$4.00	60	90
$5.00	40	110

Analysis:

1. At $2.00 per kg: There is a surplus (50 kg supplied > 100 kg demanded).
2. At $3.00 per kg: The surplus is reduced (70 kg supplied > 80 kg demanded).
3. At $4.00 per kg: The surplus is further reduced (90 kg supplied > 60 kg demanded).
4. At $5.00 per kg: There is a shortage (40 kg demanded < 110 kg supplied).

Equilibrium Price and Quantity:

The equilibrium occurs where the quantity demanded equals the quantity supplied. In this example, the equilibrium price is $4.00 per kg, and the equilibrium quantity is 70 kg.

How the Market Reaches Equilibrium

When there is a surplus, sellers will lower their prices to try and sell their excess inventory. This lower price will increase the quantity demanded and decrease the quantity supplied, moving the market towards equilibrium.

Conversely, when there is a shortage, consumers will be willing to pay more for the limited available quantity. This higher price will decrease the quantity demanded and increase the quantity supplied, also moving the market towards equilibrium.

Conclusion

Understanding demand and supply schedules is crucial for interpreting market disequilibrium. By analyzing the relationship between price and quantity, we can identify surpluses and shortages and understand how markets adjust to reach equilibrium.

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