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2.5.1. market equilibrium
2.5.2. market disequilibrium
By the end of this chapter, students should be able to:
★ defi ne market equilibrium
★ draw and interpret demand and supply schedules and curves to establish equilibrium
★ define market disequilibrium
★ draw and interpret diagrams to show shortages (excess demand) and
surpluses (excess supply).
Market equilibrium
Market equilibrium refers to the position where the demand for a product is equal to the supply of the product. At this point, an equilibrium price (also known as the market clearing price) is established. At the equilibrium price, there is neither excess quantity demanded nor excess quantity supplied (see Figure 9.1), and thus the equilibrium quantity is determined.
Diagrammatic representation of market equilibrium
Market disequilibrium
Market disequilibrium occurs when the quantity demanded for a product is either higher or lower than the quantity supplied. Disequilibrium is ineffi cient as it means there are either shortages or surpluses.
Shortages
If the selling price of a product is set too low (that is, below the equilibrium price), then demand will exceed supply (see Figure 9.2). This excess demand creates a shortage in the market. At a price of P1, demand is Qd, while supply is only Qs. Hence, demand exceeds supply at this price. The excess demand will tend to cause price to rise back towards the equilibrium price of Pe.
Surpluses
If the price is set too high (above the market clearing price), then supply will exceed demand, as shown in Figure 9.3. This results in a surplus, known as excess supply. In order for fi rms to get rid of their excess supply (shown by the distance between Qs and Qd at each price level above the equilibrium price), they will need to reduce price (from P1 to Pe). This is a key reason why leftover stocks of Christmas cards are reduced in price after 25 December and why unsold summer clothes go on sale during the autumn.
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