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!

Market Disequilibrium Market Disequilibrium

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Table of contents

    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

    What is market disequilibrium?

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

    What are the two causes of a disequilibrium market?

    The two causes of disequilibrium occurring in a market are:

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

    Why does excess demand create disequilibrium in the market?

    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.

    Why do price controls create disequilibrium in the market?

    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.

    What factors can lead to a market disequilibrium?

    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

    Test your knowledge with multiple choice flashcards

    A shortage occurs when...

    In a surplus, quantity demanded is...

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

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