Written by Market equilibrium is a state in which the supply and demand for a good or service is balanced.
This means that the quantity of a good or service that consumers want to buy is equal to the quantity that producers are willing to sell at a given price.
This balance is achieved at a specific price known as the equilibrium price and the quantity where this balance occurs is called equilibrium quantity.
The equilibrium price is also known as the market-clearing price because, at this price, there will be no leftover or surplus, so the market is said to have cleared.
This represents a state of balance and efficiency in the market, where neither producers nor consumers have the incentive to change their behavior.
Graphically, market equilibrium can be represented as the intersection of the demand curve and supply curve.
The demand curve shows the relationship between the price of a good or service and the quantity that consumers are willing to buy. The supply curve shows the relationship between the price of a good or service and the quantity that producers are willing to sell.
At the intersection of these two curves, the quantity demanded is equal to the quantity supplied, and the market is in equilibrium.
If the price is above or below this equilibrium point, there will be either a surplus or shortage in the market, which will cause prices to adjust until equilibrium is reached.
Market Disequilibrium
Market disequilibrium is a situation where internal and/or external forces prevent market equilibrium from being reached or cause the market to fall out of balance.
It arises when the quantity of a good or service demanded by consumers does not equal the quantity supplied by producers at the prevailing market price.
Market disequilibrium creates either a shortage or a surplus in the market depending on whether price is fixed above or below the equilibrium point.
Shortage
A shortage occurs when the quantity demanded exceeds the quantity supplied at a given price.
This can happen when the price of a good or service is fixed below its equilibrium level, leading to excess demand.
In this situation, there isn’t enough of the good or service available to meet consumer demand so that consumers may have to compete with each other to secure the limited available quantity.
This competition will create an upward pressure on prices, causing them to increase until the market reaches equilibrium.
So, when there is shortage in the market, the quantity demanded exceeds quantity supply so that the price continue to rise until it reaches the equilibrium level.
Surplus
A surplus occurs when the quantity of a good or service supplied by producers exceeds the quantity demanded by consumers at a specific price level.
It occurs when the price of a good or service is fixed above the equilibrium price, resulting in excess supply as less are demanded due to higher price when more are supply due to lesser price.
The effect of a surplus in the market is that it can create a downward pressure on prices.
As suppliers seek to sell their excess inventory, they may lower their prices in order to attract more buyers.
This cause the price of the good or service to decrese until the market equilibrium is re-established.
Both surplus and shortage are examples of market disequilibrium.
In this situation, the market is not operating efficiently, and there is a need for the market to adjust back to its place of balance.
Market forces work to restore equilibrium by adjusting prices and quantities until supply and demand are once again equal.
There are several factors that can cause a surplus or shortage in a market.
For example, an increase in demand for a good or service will result in shortage if supply cannot keep up with demand.
Similarly, a decrease in supply can also lead to a shortage if demand remains unchanged.
On the other hand, a decrease in demand for a good or service will lead to surplus if supply remains unchanged.
Similarly, an increase in supply can also lead to a surplus if demand remains unchanged.
Government intervention can also cause surpluses and shortages in a market.
For example, if the government imposes a price ceiling on a good or service, it would lead to a shortage if the market price is below the equilibrium level.
Similarly, if the government imposes a price floor on a good or service, it can lead to a surplus if the market price is above the equilibrium level.
Equilibrium, Surplus and Shortage Using the Demand Schedule and Surplus
Equilibrium, surplus, and shortage can be represented using a demand and supply schedule, which shows the relationship between price, quantity demanded, and quantity supplied.
| Price | Quantity Demanded | Quantity Supplied | Effect |
|---|---|---|---|
| $10 | 50 | 100 | Surplus |
| $9 | 60 | 90 | Surplus |
| $8 | 70 | 80 | Surplus |
| $7 | 65 | 65 | Market cleared |
| $6 | 90 | 60 | Shortage |
| $5 | 100 | 50 | Shortage |
In this example, the equilibrium price is $7 and the equilibrium quantity is 65.
At this price, the quantity demanded is equal to the quantity supplied, and there is no surplus or shortage.
This represents a state of balance and efficiency in the market, where neither producers nor consumers have an incentive to change their behavior.
At prices above the equilibrium price, there is a surplus of goods, while at prices below the equilibrium price, there is a shortage of goods.
