Equilibrium and Disequilibrium in the market

The word equilibrium means at rest. Equilibrium in the market is the combination of price and quantity from which there is no tendency for buyers or sellers to move away. In a graphical representation, equilibrium means the intersection point of the supply and the demand curves.

Equilibrium Price or Market Clearing Price is the price at which the quantity demanded of a good equals the quantity supplied.

Equilibrium Quantity is the quantity that corresponds to the equilibrium price. This is the quantity at which the amount of the good that buyers are willing and able to buy equals the amount that sellers are willing and able to sell, and both equal the amount actually bought and sold.

Equilibirum in the market
Demand & Supply of Compact Discs – P* is the equilibrium price and Q* is the equilibrium quantity

Disequilibirum in the market arises at any price at which the quantity demanded is not equal to the quantity supplied. In other words, this is a situation of either a surplus or shortage in the market.

If the quantity supplied is greater than the quantity demanded, it is termed as a surplus or excess supply.

If the quantity demanded is greater than the quantity supplied, it is known as a shortage or excess demand.

What happens when there is a shortage or a surplus?

Shortage and Surplus

The situation of surplus

When we look at this diagram, we can see that there is a surplus at a price of $15: the quantity supplied is 150 units where as the quantity demanded is 50 units. Suppliers will not be able to sell all they had hoped to sell at $15. As a result their stock of goods will grow above the level they usually hold in preparation for the demand changes. If the sellers want to reduce this stockpile of goods, either they have to reduce the price or cut back on production or they could do both. Therefore there will be a tendency for price and the output to fall until the equilibrium is achieved. This is shown in the diagram with the downward arrows.

The situation of shortage

At the price of $5, there is a shortage. Quantity demanded is greater than the quantity supplied. Buyers will not be able to buy all that they hoped to buy at $5. Some buyers will offer to buy at higher prices so that the sellers would sell to them rather than to the other buyers. When the sellers realize this, they will raise the prices to get more profit, and also they will try to increase output since it is profitable to do so. This tendency for the price and output to increase will continue until the equilibrium is achieved.

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