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Market Disequilibrium

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Market Disequilibrium

When consumers and producers are able to find the compromising quantity and price for a good such that each party is satisfied, market equilibrium occurs. In equilibrium, the quantity supplied and demanded is equal, meaning there is not too little nor too much of the good in the market. But what happens when there is not enough of a product or service in the market to satisfy the demand, or too much for producers to be able to get rid of their supply entirely? This is when market disequilibrium occurs. You probably can relate to a situation where an item you wanted to purchase was out of stock. Well, economists have a way of explaining it! Dive in to find out!

Concept of market equilibrium and disequilibrium

Equilibrium is equivalent to the point where the quantity demanded equals the quantity supplied, thus allowing the market to clear with no shortage or surplus of the goods. The price that corresponds to this point is the equilibrium price.

But what happens if the market price shifts below or above the equilibrium? This is when market disequilibrium occurs. Well, at least temporarily.

Market disequilibrium occurs when the quantity demanded either exceeds or falls short of the quantity supplied, thus leading to a shortage or surplus.

Difference between market equilibrium and disequilibrium

When the price shifts in either direction away from the equilibrium and prevents the market from clearing, disequilibrium occurs. Thus, the difference between market equilibrium and disequilibrium is that unlike the former, disequilibrium takes place when quantity demanded does not equate to the quantity supplied, thus leaving either a shortage (lack of product or service to satisfy demand) or a surplus (excess of product or service).

Disequilibrium definition economics

If the price falls below the equilibrium price, it would cause the quantity demanded to be greater than the quantity supplied, which would result in a shortage. Inversely, if the price rises above the equilibrium, the quantity supplied outweighs the quantity demanded and results in a surplus. Both are cases of disequilibrium, and can occur due to factors such as sticky prices, government controls, and producers' decisions that fail to maximize profit.

Market disequilibrium occurs when the equilibrium price and quantity required for a market to clear destabilize and lead to a shortage or surplus.

Market disequilibrium graph - shortages and surpluses

If, for any reason, quantity demanded exceeds quantity supplied, there will be a shortage, meaning there is not enough product or service supplied to fulfill the existing demand. Alternatively, if the quantity supplied exceeds quantity demanded, there will be a surplus, meaning there is not enough demand to consume the quantity of the good or service placed on the market.

Market disequilibrium graph - shortage

A market shortage takes place when quantity demanded is greater than quantity supplied. In most cases, such excess demand occurs due to the market price being below the equilibrium. The Law of Demand states that the lower the price, the higher the quantity consumers will seek. However, at the point where price is lower than the equilibrium, supply will be unable to suffice the quantity demanded, meaning that consumers will be unable to obtain as much of a product or service as they seek.

A shortage occurs when there is a lack of product or service to satisfy demand. It occurs when the price is below equilibrium and the quantity demanded is greater than the quantity supplied.

Take a look at Figure 1 below for an example of a market disequilibrium graph with a shortage illustrated on a graph. P1 represents the price corresponding to the market equilibrium, where the quantity demanded equals quantity supplied (Q2). However, when price shifts to P2, quantity demanded at Q3 is now greater than quantity supplied at Q1, thus creating a shortage of Q3-Q1.

market disequilibrium resulting in shortage studysmarterFigure 1. Market disequilibrium resulting in a shortage, StudySmarter Originals

In response to the demand of the consumers, producers will raise both the price of their product and the quantity they are willing to supply. The increase in price will be too much for some consumers and they will no longer demand the product. Meanwhile, the increased quantity of available products will satisfy other consumers. Eventually, equilibrium will be reached. In this situation, excess demand has exerted upward pressure on the price of the product.

Market disequilibrium graph - surplus

If quantity supplied exceeds quantity demanded, the result is a surplus. This can occur due to the market price rising above the equilibrium price. As per the Law of Supply states that quantity supplied increases as price increases, and producers will provide higher quantities of their product or service due to the higher price. However, at this point, the price will be too high for consumers to clear the market, thus leaving a surplus.

A surplus occurs when there is an excess of product or service compared to demand. It occurs when the price is above equilibrium and the quantity supplied is greater than the quantity demanded.

Refer to Figure 2 for an example of a market disequilibrium graph with a surplus occurring in the market. At price P1, which corresponds to the equilibrium, quantity supplied equals quantity demanded at Q2. But when price rises to P2, quantity supplied shifts to Q3 while quantity demanded at this higher price is lower, at Q1, thus creating a surplus of Q3-Q1.

Market disequilibrium resulting in a surplus StudySmarter OriginalsFigure 2: Market disequilibrium resulting in a surplus, StudySmarter Originals

This will induce firms to lower their price to make their product more appealing. In order to stay competitive, many firms will lower their prices, thus lowering the market price for the product. In response to the lower price, consumers will increase their quantity demanded, moving the market toward the equilibrium price and quantity. In this situation, excess supply has exerted downward pressure on the price of the product.

Causes of market disequilibrium

While there are many factors that can cause disequilibrium in a market, consider the ones outlined below:

Market Disequilibrium: Sticky prices

Price stickiness refers to the resistance of the market price of a product or service to change in response to changes and conditions in the market that direct the price to an optimal point. Prices may be “sticky” due to suppliers being resistant or unwilling to quickly change prices despite the changes in market conditions (for example, changes in consumer behavior, production costs) pointing them to do so.

Market Disequilibrium: Government controls

Governmental authorities may intervene in markets by setting price floors or price ceilings for certain products or services. Price floors are price minimums enforced by the government, meaning the price of an affected product or service cannot go lower than the set price floor. Price ceilings are set at maximum prices, hence preventing the price of a product or service at hand to increase past the price ceiling.

Price floors may lead to surpluses if the set price is significantly greater than the equilibrium, thus causing the quantity supplied to be greater than the quantity demanded, with no way to adjust for the imbalance due to the government enforcement. Inversely, price ceilings may cause shortages if the set price is below the equilibrium, thus leading to quantity demanded exceeding quantity supplied.

To learn more about this form of government controls check our explanations on - Price Control, Price Ceilings and Price Floors.

Market Disequilibrium: Producers' decisions

Based on various circumstances and the influence of outside factors, producers may not always make decisions that are aimed to maximize utility, which would otherwise allow the market to balance out. Suppliers may manipulate prices and quantities supplied in a different direction from what the market suggests. In turn, such decisions may lead to quantities supplied being greater or less than the quantity demanded, thus causing surpluses or shortages.

Market Disequilibrium: Changes in consumer behavior

Shortages and surpluses may occur due to other abnormalities in consumer behavior influenced by a variety of social factors. Consumers may suddenly change their purchasing behaviors based on recent events, news, developments in research, and other factors that may impact how consumers make their purchasing decisions. As a result of such sudden changes, shortages or surpluses may occur for certain goods and services.

Market disequilibrium example

Consider a hypothetical situation provided below for a market disequilibrium example, where the change in consumer behavior leads to disequilibrium.

A sudden epidemic of stomach flu rumored to stem from a batch of imported fresh produce that has been contaminated by the virus breaks out. As a result, a significant proportion of consumers abruptly stop buying the imported produce in an effort to avoid getting sick. This sudden change in consumer behavior leaves sellers of the produce with excess quantities of the product with insufficient demand to get rid of it, thus creating a temporary surplus.

Market Disequilibrium - Key takeaways

  • Disequilibrium occurs when a market destabilizes such that quantity demanded does not equal quantity supplied, thus creating either a shortage or a surplus.
  • Shortages occur when quantity demanded is greater than quantity supplied at the market price.
  • Surpluses occur when quantity supplied is greater than quantity demanded at the market price.
  • On the graph, shortages and surpluses are reflected by the difference between quantity demanded and quantity supplied.
  • Possible causes of disequilibrium and the subsequent shortages/surpluses are: sticky prices, government controls, producers' decisions, and sudden deviations in consumer behavior.

Frequently Asked Questions about Market Disequilibrium

Market disequilibrium occurs when quantity demanded either exceeds or falls short of the quantity supplied, thus leading to a shortage or surplus.

The two causes of disequilibrium occurring in a market are:

  • Shortages: when quantity demanded exceeds quantity supplied
  • Surpluses: when quantity supplied exceeds quantity demanded

Excess demand means that quantity demanded outweighs quantity supplied, which likely means that the market price is below the equilibrium and consequently creates a shortage.

If the fixed price dictated by the price controls is below or above equilibrium, it will lead to quantities supplied being either too low or too high to satisfy demand at the given price, thus creating a shortage or surplus, respectively.

The factors that can lead to disequilibrium in a market are:

  • Sticky prices
  • Government controls (price controls, price ceilings, price floors)
  • Producers' decisions that are inefficient and/or do not maximize profit
  • Deviations in consumer behavior

Final Market Disequilibrium Quiz

Question

Market disequilibrium occurs when...

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Quantity of a product or service demanded exceeds quantity supplied, or quantity supplied exceeds quantity demanded

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A shortage occurs when...

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Quantity demanded exceeds quantity supplied

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In a surplus, quantity demanded is...

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below the quantity supplied

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What does it mean for a market to clear?

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A market can clear when quantity demanded equals quantity supplied, thus leaving no shortage nor surplus.

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How do you find the equilibrium price?

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Equilibrium price corresponds to the point of intersection between the demand and supply curves.

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Would a price below the equilibrium likely cause a shortage or a surplus?

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Shortage

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In the event of the market price shifting above the equilibrium, where can you find the surplus on the supply and demand graph?

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The surplus equals the distance/difference between quantity supplied at the new price and the quantity demanded at that price

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When does a shortage occur?

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A shortage occurs when the market price is below the equilibrium, thus attracting more consumers to seek the product or service than the supply can satisfy

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What is a price floor?

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Price floors are price minimums for certain products or services set by governmental authorities

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What is a price ceiling?

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Price ceilings are price maximums for certain products or services enforced by governmental authorities

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How can a price floor create a surplus?

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If the price floor is set above the equilibrium, quantity demanded will be short of quantity supplied, and a surplus of the affected product or service will result.

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How can a price ceiling create a shortage?

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If a price ceiling is set below the equilibrium, the quantity demanded will exceed the quantity supplied, thus resulting in a shortage.

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Where can a shortage be found on the graph in case of the market price falling below the equilibrium?

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The shortage equals the distance/difference between the quantity demanded at the new market price and the quantity supplied at that price.

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To correct for a shortage, the market price must...

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Increase

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What is meant by price stickiness?

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Price stickiness refers to the resistance of a price for a product or service to change timely toward the optimal point as suggested by the market conditions.

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Question

Fill the blank in the following statement:


Equilibrium is equivalent to the point where the ... equals the .... 

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quantity demanded/quantity supplied

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Which economic term is used to describe the price where the quantity demanded equals the quantity supplied?

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equilibrium price

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Which is the right word to fill the blank?

Market ... occurs when the quantity demanded either exceeds or falls short of the quantity supplied, thus leading to a shortage or surplus.


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disequilibrium

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Identify the incorrect segment out of the highlighted options.


Disequilibrium takes place when quantity demanded does not equate to the quantity supplied, thus leaving either a shortage (lack of product or service to satisfy demand) or a surplus (lack of product or service). 

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Answer

Disequilibrium

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Fill the blank in the following definition:

If the price falls below the equilibrium price, it would cause the quantity demanded to be ... than the quantity supplied, which would result in a ...

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greater/shortage

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Fill the blank in the following definition:


... occurs when there is an excess of product or service compared to .... 

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surplus/demand

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Which economic term is used to describe the resistance of the market price of a product or service to change in response to changes and conditions in the market that direct the price to an optimal point?

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Answer

Price stickiness 

Show question

Question

How do governmental authorities intervene in markets?

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Answer

Governmental authorities may intervene in markets by setting price floors or price ceilings for certain products or services.

Show question

Question

Which economic term is used to describe the set at maximum prices?

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Answer

Price ceilings are set at maximum prices, hence preventing the price of a product or service at hand to increase past the price ceiling.

Show question

Question

Explain the impact of the changes in consumer behavior in market disequilibrium. 

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Answer

Shortages and surpluses may occur due to other abnormalities in consumer behavior influenced by a variety of social factors. Consumers may suddenly change their purchasing behaviors based on recent events, news, developments in research, and other factors that may impact how consumers make their purchasing decisions. As a result of such sudden changes, shortages or surpluses may occur for certain goods and services. 


Show question

Question

Give an example where the change in consumer behavior leads to disequilibrium

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Answer

A sudden epidemic of stomach flu rumored to stem from a batch of imported fresh produce that has been contaminated by the virus breaks out. As a result, a significant proportion of consumers abruptly stop buying the imported produce in an effort to avoid getting sick. This sudden change in consumer behavior leaves sellers of the produce with excess quantities of the product with insufficient demand to get rid of it, thus creating a temporary surplus.


Show question

Question

How are the shortage  and surpluses are reflected on the graph?

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Answer

On the graph, shortages and surpluses are reflected by the difference between quantity demanded and quantity supplied.


Show question

Question

What are the possible causes of disequilibrium and the subsequent shortages/surpluses?

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Answer

Possible causes of disequilibrium and the subsequent shortages/surpluses are: sticky prices, government controls, producers' decisions, and sudden deviations in consumer behavior.


Show question

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Equilibrium occurs when...

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... the quantity demanded equals the quantity supplied,

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Explain the difference of shortage and surplus.

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A shortage is the lack of product or service to satisfy demand whereas  a surplus is the excess of product or service. 

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If the price falls below the equilibrium price...

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... it would cause the quantity demanded to be greater than the quantity supplied, which would result in a shortage.

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