Market Equilibrium & Disequilbrium

When does equilibrium in a market occur?

• When demand = supply

• At this point, the price is called the equilibrium or market=clearing price

• This is the price at which sellers are selling their stock at an acceptable rate

What diagram shows market equilibrium?

When does market disequilibrium due to excess demand occur?

• Excess demand occurs when the demand is greater than the supply

• It can occur when prices are too low or when demand is so high that supply cannot keep up with it

What diagram shows market disequilibrium due to excess demand?

• At a price of P₁, the quantity demanded of electric scooters (Q_d) is greater than the quantity supplied (Q_s)

• There is a shortage (excess demand) in the market equivalent to Q_sQ_d

What is the market response to excess demand?

• This market is in disequilibrium

  • Sellers are frustrated that products are selling so quickly at a price that is obviously too low

  • Some buyers are frustrated as they will not be able to purchase the product

• Sellers realise they can increase prices and generate more revenue and profits

• Sellers gradually raise prices

  • This causes a contraction in QD as some buyers no longer desire the good/service at a higher price

  • This causes an extension in QS as other sellers are more incentivised to supply at higher prices

• In time, the market will have cleared the excess demandand arrive at a position of equilibrium, P_eQ_e

  • Different markets take different lengths of time to resolve disequilibrium

When does market disequilibrium due to excess supply occur?

• Excess supply occurs when the supply is greater than the demand

• It can occur when prices are too high or when demand falls unexpectedly

What diagram shows market disequilibrium due to excess supply?

• At a price of P₁, the quantity supplied of face masks (Q_s) is greater than the quantity demanded (Q_d)

• There is a surplus in the market (excess supply) equivalent to Q_dQ_s

What is the market response to excess supply?

• This market is in disequilibrium

  • Sellers are frustrated that the masks are not sellingand that the price is obviously too high

  • Some buyers are frustrated as they want to purchasethe masks but are not willing to pay the high price

• Sellers will gradually lower prices in order to generate more revenue

  • This causes a contraction in QS as some sellers no longer desire to supply masks

  • This causes an extension in QD as buyers are more willing to purchase masks at lower prices

• In time, the market will have cleared the excess supplyand arrive at a position of equilibrium, P_eQ_e