definition of market equilibrium and disequilibrium

Resources | Subject Notes | Economics

Market Equilibrium and Disequilibrium

This section explores the fundamental concepts of market equilibrium and disequilibrium, which are central to understanding how prices and quantities are determined in a market economy. We will define these concepts, analyze their causes, and discuss their implications.

Market Equilibrium

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

Graphically, market equilibrium is represented by the intersection of the demand and supply curves. The price at this intersection is the equilibrium price (P*) and the corresponding quantity is the equilibrium quantity (Q*).

Suggested diagram: A standard supply and demand diagram with equilibrium price and quantity clearly labeled.

Disequilibrium

Disequilibrium refers to a situation where the quantity demanded and the quantity supplied are not equal. This leads to either a surplus or a shortage.

Surplus: A surplus occurs when the quantity supplied exceeds the quantity demanded at a given price. This typically happens when the price is above the equilibrium price. Producers have more goods available than consumers want to buy.

Shortage: A shortage occurs when the quantity demanded exceeds the quantity supplied at a given price. This typically happens when the price is below the equilibrium price. Consumers want to buy more goods than producers are willing to supply.

Table Summarizing Equilibrium and Disequilibrium

Condition Quantity Demanded Quantity Supplied Price Market Tendency
Equilibrium $Q^*$ $Q^*$ $P^*$ Stable
Surplus (Less than $Q^*) (Greater than $Q^*) (Above $P^*) Price will fall
Shortage (Greater than $Q^*) (Less than $Q^*) (Below $P^*) Price will rise

Factors Affecting Equilibrium

The equilibrium price and quantity can change due to shifts in either the demand or supply curves.

  • Demand Shifts: Changes in factors other than price (e.g., consumer income, tastes, prices of related goods) can shift the demand curve. An increase in demand shifts the demand curve to the right, leading to a higher equilibrium price and quantity. A decrease shifts it to the left, leading to a lower equilibrium price and quantity.
  • Supply Shifts: Changes in factors other than price (e.g., input costs, technology, expectations) can shift the supply curve. An increase in supply shifts the supply curve to the right, leading to a lower equilibrium price and a higher equilibrium quantity. A decrease shifts it to the left, leading to a higher equilibrium price and a lower equilibrium quantity.

The Role of Government Intervention

Governments may intervene in markets to try and influence equilibrium prices and quantities. Examples include price ceilings, price floors, and taxes. These interventions can create further disequilibrium and unintended consequences.