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1.6 Market Equilibrium, Disequilibrium, and Changes in Equilibrium

3 min readdecember 27, 2022

J

Jeanne Stansak

I

Isabela Padilha Vilela

J

Jeanne Stansak

I

Isabela Padilha Vilela

Market Equilibrium

is a condition in a market where the quantity supplied equals the quantity demanded at an optimal price level. This occurs as a result of voluntary exchange. Through voluntary exchange, consumers and firms mutually benefit in the marketplace, as utility and profits are maximized. When a market is in equilibrium, it is allocatively efficient, and consumer and is maximized.

https://firebasestorage.googleapis.com/v0/b/fiveable-92889.appspot.com/o/images%2F-xlVqhbYoiHqu.png?alt=media&token=93fa28bc-de8e-42a6-b760-cea93ad136ed

Market Disequilbrium

Prices naturally fluctuate away from equilibrium, which causes . 🥴

When there is an increase in the price level, firms have an incentive to supply a greater quantity in order to maximize profits. However, the quantity demanded decreases as consumers are less willing or able to buy. This causes a condition in a market where the price level has risen too high, causing quantity supplied to be greater than the quantity demanded. This is known as a (see graph below).

When there is a decrease in the price level, consumers demand a greater quantity, as goods are less expensive. However, the quantity supplied decreases as firms lose the incentive to supply the same quantity at lower prices. This causes a condition in a market where the price level has fallen too low, causing the quantity demanded to be greater than the quantity supplied. This is known as a (see graph below).

https://firebasestorage.googleapis.com/v0/b/fiveable-92889.appspot.com/o/images%2F-fw8TMm3nvY2g.png?alt=media&token=5a3e6494-6851-40a9-a068-cf72b4d04b94

When the price decreases from P1 to P3, there is an increase in the quantity demanded (150 units to 200 units), and there is a decrease in the quantity supplied (150 units to 100 units).

At P3, the quantity demanded is 200 and the quantity supplied is 100, so there is a shortage of 100 units. This means that consumers want more goods than producers are willing to make.

When the price increases from P1 to P2, there is a decrease in the quantity demanded (150 units to 100 units), and there is an increase in the quantity supplied (150 units to 200 units).

At P2, the quantity demanded is 100 and the quantity supplied is 200, so there is a surplus of 100 units.

Changes in Market Equilibrium

When the (I-N-S-E-C-T) and the (R-O-T-T-E-N) cause changes in either demand or supply, then there is a . There are four potential changes that cause market price and quantity to change:

https://firebasestorage.googleapis.com/v0/b/fiveable-92889.appspot.com/o/images%2F-kHHVuj03Zsn9.png?alt=media&token=f7da8283-6e2c-402d-b6c6-0b482a95b8ab

https://firebasestorage.googleapis.com/v0/b/fiveable-92889.appspot.com/o/images%2F-Kzh22hc4a5Qc.png?alt=media&token=7b8e8f63-7cda-4838-816f-58c51acf7485

https://firebasestorage.googleapis.com/v0/b/fiveable-92889.appspot.com/o/images%2F-0N6dWlXHEP2S.png?alt=media&token=3e11f29b-585b-46d2-8524-7e80f8d754bb

https://firebasestorage.googleapis.com/v0/b/fiveable-92889.appspot.com/o/images%2F-0YObFuyoeQWN.png?alt=media&token=13a24276-8498-4d65-98f3-da6c8d1b229b

Recap of the topic:

Key concepts:

  • - quantity of a good or service that is available exceeds the quantity demanded by consumers.

  • - quantity of a good or service that is available is less than the quantity demanded by consumers.

Changes in Equilibrium:

  • - Equilibrium price ⬆️, Equilibrium quantity ⬆️

  • - Equilibrium price ⬇️, equilibrium quantity ⬇️

  • - Equilibrium price ⬇️, Equilibrium quantity ⬆️

  • - Equilibrium price inc ⬆️, equilibrium quantity ⬇️

Key Terms to Review (14)

Allocative Efficiency

: Allocative efficiency refers to an economic state where resources are allocated in such a way that maximizes overall societal welfare or utility.

Change in Market Equilibrium

: A change in market equilibrium occurs when there is a shift in either the demand or supply curve, resulting in a new equilibrium price and quantity.

Consumer Surplus

: Consumer surplus refers to the difference between what consumers are willing to pay for a good or service and what they actually have to pay. It represents the extra benefit or value that consumers receive from purchasing a product at a price lower than their maximum willingness to pay.

Decrease in Demand

: A decrease in demand refers to a situation where consumers are willing and able to buy less of a product at every possible price, leading to a leftward shift of the demand curve.

Decrease in Supply

: A decrease in supply refers to a situation where producers are able and willing to offer less of a product at each price level. This can be caused by factors such as higher production costs, scarcity of resources, or natural disasters affecting production.

Determinants of Demand

: Determinants of demand are factors other than price that influence consumers' willingness and ability to buy goods or services.

Determinants of Supply

: Determinants of supply are factors other than price that influence producers' willingness and ability to offer goods or services for sale.

Increase in Demand

: An increase in demand refers to a situation where consumers are willing and able to buy more of a product at every possible price, leading to a rightward shift of the demand curve.

Increase in Supply

: An increase in supply refers to a situation where producers are able and willing to offer more of a product at each price level. This can be caused by factors such as technological advancements, lower production costs, or an increase in the number of suppliers.

Market Disequilibrium

: Market disequilibrium refers to a situation where there is an imbalance between demand and supply in a market, leading to either excess demand (shortage) or excess supply (surplus). In other words, it occurs when the quantity demanded does not equal the quantity supplied.

Market Equilibrium

: Market equilibrium refers to the point where the quantity demanded by buyers equals the quantity supplied by sellers, resulting in a balance between supply and demand in a market.

Market Shortage

: A market shortage occurs when the quantity demanded of a good or service exceeds the quantity supplied, resulting in an imbalance between supply and demand.

Market Surplus

: Market surplus refers to a situation where the quantity supplied of a good or service exceeds the quantity demanded at a given price. It occurs when there is excess supply in the market, leading to downward pressure on prices.

Producer Surplus

: Producer surplus refers to the difference between the price at which producers are willing to sell a good or service and the actual price they receive. It represents the extra profit that producers make when they can sell their products at a higher price than what they were willing to accept.

1.6 Market Equilibrium, Disequilibrium, and Changes in Equilibrium

3 min readdecember 27, 2022

J

Jeanne Stansak

I

Isabela Padilha Vilela

J

Jeanne Stansak

I

Isabela Padilha Vilela

Market Equilibrium

is a condition in a market where the quantity supplied equals the quantity demanded at an optimal price level. This occurs as a result of voluntary exchange. Through voluntary exchange, consumers and firms mutually benefit in the marketplace, as utility and profits are maximized. When a market is in equilibrium, it is allocatively efficient, and consumer and is maximized.

https://firebasestorage.googleapis.com/v0/b/fiveable-92889.appspot.com/o/images%2F-xlVqhbYoiHqu.png?alt=media&token=93fa28bc-de8e-42a6-b760-cea93ad136ed

Market Disequilbrium

Prices naturally fluctuate away from equilibrium, which causes . 🥴

When there is an increase in the price level, firms have an incentive to supply a greater quantity in order to maximize profits. However, the quantity demanded decreases as consumers are less willing or able to buy. This causes a condition in a market where the price level has risen too high, causing quantity supplied to be greater than the quantity demanded. This is known as a (see graph below).

When there is a decrease in the price level, consumers demand a greater quantity, as goods are less expensive. However, the quantity supplied decreases as firms lose the incentive to supply the same quantity at lower prices. This causes a condition in a market where the price level has fallen too low, causing the quantity demanded to be greater than the quantity supplied. This is known as a (see graph below).

https://firebasestorage.googleapis.com/v0/b/fiveable-92889.appspot.com/o/images%2F-fw8TMm3nvY2g.png?alt=media&token=5a3e6494-6851-40a9-a068-cf72b4d04b94

When the price decreases from P1 to P3, there is an increase in the quantity demanded (150 units to 200 units), and there is a decrease in the quantity supplied (150 units to 100 units).

At P3, the quantity demanded is 200 and the quantity supplied is 100, so there is a shortage of 100 units. This means that consumers want more goods than producers are willing to make.

When the price increases from P1 to P2, there is a decrease in the quantity demanded (150 units to 100 units), and there is an increase in the quantity supplied (150 units to 200 units).

At P2, the quantity demanded is 100 and the quantity supplied is 200, so there is a surplus of 100 units.

Changes in Market Equilibrium

When the (I-N-S-E-C-T) and the (R-O-T-T-E-N) cause changes in either demand or supply, then there is a . There are four potential changes that cause market price and quantity to change:

https://firebasestorage.googleapis.com/v0/b/fiveable-92889.appspot.com/o/images%2F-kHHVuj03Zsn9.png?alt=media&token=f7da8283-6e2c-402d-b6c6-0b482a95b8ab

https://firebasestorage.googleapis.com/v0/b/fiveable-92889.appspot.com/o/images%2F-Kzh22hc4a5Qc.png?alt=media&token=7b8e8f63-7cda-4838-816f-58c51acf7485

https://firebasestorage.googleapis.com/v0/b/fiveable-92889.appspot.com/o/images%2F-0N6dWlXHEP2S.png?alt=media&token=3e11f29b-585b-46d2-8524-7e80f8d754bb

https://firebasestorage.googleapis.com/v0/b/fiveable-92889.appspot.com/o/images%2F-0YObFuyoeQWN.png?alt=media&token=13a24276-8498-4d65-98f3-da6c8d1b229b

Recap of the topic:

Key concepts:

  • - quantity of a good or service that is available exceeds the quantity demanded by consumers.

  • - quantity of a good or service that is available is less than the quantity demanded by consumers.

Changes in Equilibrium:

  • - Equilibrium price ⬆️, Equilibrium quantity ⬆️

  • - Equilibrium price ⬇️, equilibrium quantity ⬇️

  • - Equilibrium price ⬇️, Equilibrium quantity ⬆️

  • - Equilibrium price inc ⬆️, equilibrium quantity ⬇️

Key Terms to Review (14)

Allocative Efficiency

: Allocative efficiency refers to an economic state where resources are allocated in such a way that maximizes overall societal welfare or utility.

Change in Market Equilibrium

: A change in market equilibrium occurs when there is a shift in either the demand or supply curve, resulting in a new equilibrium price and quantity.

Consumer Surplus

: Consumer surplus refers to the difference between what consumers are willing to pay for a good or service and what they actually have to pay. It represents the extra benefit or value that consumers receive from purchasing a product at a price lower than their maximum willingness to pay.

Decrease in Demand

: A decrease in demand refers to a situation where consumers are willing and able to buy less of a product at every possible price, leading to a leftward shift of the demand curve.

Decrease in Supply

: A decrease in supply refers to a situation where producers are able and willing to offer less of a product at each price level. This can be caused by factors such as higher production costs, scarcity of resources, or natural disasters affecting production.

Determinants of Demand

: Determinants of demand are factors other than price that influence consumers' willingness and ability to buy goods or services.

Determinants of Supply

: Determinants of supply are factors other than price that influence producers' willingness and ability to offer goods or services for sale.

Increase in Demand

: An increase in demand refers to a situation where consumers are willing and able to buy more of a product at every possible price, leading to a rightward shift of the demand curve.

Increase in Supply

: An increase in supply refers to a situation where producers are able and willing to offer more of a product at each price level. This can be caused by factors such as technological advancements, lower production costs, or an increase in the number of suppliers.

Market Disequilibrium

: Market disequilibrium refers to a situation where there is an imbalance between demand and supply in a market, leading to either excess demand (shortage) or excess supply (surplus). In other words, it occurs when the quantity demanded does not equal the quantity supplied.

Market Equilibrium

: Market equilibrium refers to the point where the quantity demanded by buyers equals the quantity supplied by sellers, resulting in a balance between supply and demand in a market.

Market Shortage

: A market shortage occurs when the quantity demanded of a good or service exceeds the quantity supplied, resulting in an imbalance between supply and demand.

Market Surplus

: Market surplus refers to a situation where the quantity supplied of a good or service exceeds the quantity demanded at a given price. It occurs when there is excess supply in the market, leading to downward pressure on prices.

Producer Surplus

: Producer surplus refers to the difference between the price at which producers are willing to sell a good or service and the actual price they receive. It represents the extra profit that producers make when they can sell their products at a higher price than what they were willing to accept.


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© 2024 Fiveable Inc. All rights reserved.

AP® and SAT® are trademarks registered by the College Board, which is not affiliated with, and does not endorse this website.