2.7 Market Disequilibrium and Changes in Equilibrium

Market disequilibrium happens when quantity demanded does not equal quantity supplied, creating a shortage (price too low) or a surplus (price too high). Market forces then push price and quantity back toward equilibrium.

Why This Matters for the AP Microeconomics Exam

This topic builds the core supply and demand skills you will use across the whole course. You need to define shortages and surpluses, explain how shocks change price, quantity, consumer surplus, and producer surplus, and calculate those changes from a graph or table. Graphing accurately matters here. Many students lose points by mislabeling axes and curves or by confusing a shift of a curve with a movement along it. Learning shifts now sets you up for government intervention, international trade, and later market structure analysis.

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Key Takeaways

• A shortage is excess demand (Qd greater than Qs), usually from a price below equilibrium; a surplus is excess supply (Qs greater than Qd), usually from a price above equilibrium.
• Market forces drive a disequilibrium price back toward the market-clearing price: shortages push price up, surpluses push price down.
• A shift of a curve changes the equilibrium itself; a movement along a curve is just a response to a price change. These are not the same thing.
• Demand shifts move equilibrium price and quantity in the same direction; supply shifts move them in opposite directions.
• A curve shift does not create deadweight loss, because the market still clears where Qd equals Qs at a new point.
• In a double shift, one variable (price or quantity) is determinate and the other is indeterminate unless you know the relative size of each shift.

Equilibrium and Disequilibrium

In the previous topic, you saw that a market settles where quantity demanded equals quantity supplied. That point is the market equilibrium price and quantity, found where the demand curve intersects the supply curve. At equilibrium, the market clears, meaning there are no shortages or surpluses, and total economic surplus is maximized.

Market disequilibrium is any state where quantity demanded does not equal quantity supplied. It usually comes from a price set above or below the equilibrium price, which creates a gap between Qd and Qs.

Shortages and Surpluses

Disequilibrium shows up in two ways.

• Shortage (excess demand): Qd is greater than Qs. Too many buyers want the good compared to how much firms are willing to sell.
• Surplus (excess supply): Qs is greater than Qd. Firms are willing to sell more than buyers are willing and able to purchase.

Visualizing Shortages and Surpluses

When the price is below equilibrium, the law of supply means fewer suppliers want to sell, while more consumers want to buy. The result is a shortage. If P2 and Q2 are the equilibrium price and quantity, then at a lower price P1, buyers demand Q3 but sellers only supply Q1, so the shortage equals Q3 minus Q1.

When the price is above equilibrium, the opposite happens. More sellers want to sell at the high price, but fewer consumers are willing and able to buy. The result is a surplus.

Adjustment Back to Equilibrium

Markets push toward equilibrium because someone is dissatisfied in any disequilibrium. In a shortage, buyers compete for the limited good and bid the price up. In a surplus, sellers cut prices to clear unsold goods. So:

• In a shortage, price rises until Qd equals Qs.
• In a surplus, price falls until Qd equals Qs.

In either disequilibrium state, total economic surplus is not maximized.

Consumer Surplus, Producer Surplus, and Deadweight Loss

Consumer surplus is the difference between what buyers are willing to pay and what they actually pay. Producer surplus is the difference between what sellers are willing to accept and what they actually receive. At equilibrium, total surplus is maximized.

When the market is held away from equilibrium, total surplus shrinks. The lost surplus that no longer goes to either group is deadweight loss. This matters most when a price is stuck away from equilibrium, such as under a binding price control. Keep in mind: a price stuck above or below equilibrium creates deadweight loss, but a curve shift to a new equilibrium does not, because the market still clears.

Changes in Market Equilibrium

Equilibrium also changes when a curve shifts. From earlier topics, recall that determinants of demand (income, tastes, prices of substitutes and complements, expectations, number of buyers) and determinants of supply (input costs, technology, taxes and subsidies, expectations, number of sellers) shift the whole curve. A shift moves the intersection point, so equilibrium price and quantity change.

Demand shifts move price and quantity in the same direction.

• Demand increase (rightward shift): equilibrium price and quantity both rise.
• Demand decrease (leftward shift): equilibrium price and quantity both fall.

For example, suppose rising college enrollment increases the demand for textbooks (an application of the number-of-buyers determinant). Demand shifts right, so price moves from P1 to P2 and quantity from Q1 to Q2. This is not a shortage; it is a different demand curve and a new equilibrium.

Supply shifts move price and quantity in opposite directions.

• Supply increase (rightward shift): equilibrium quantity rises and price falls.
• Supply decrease (leftward shift): equilibrium quantity falls and price rises.

For example, if the price of a key input like steel rises, the supply of cars shifts left (an application of the input-cost determinant). Price rises and quantity falls. Again, no shortage or surplus appears, because the market still clears at the new equilibrium.

The size of the change in price, quantity, consumer surplus, producer surplus, and total surplus depends on the price elasticities of supply and demand. A given shift causes a bigger price change when the other curve is more inelastic, and a bigger quantity change when the other curve is more elastic.

Double-Shift Problems

A double shift happens when both supply and demand shift at the same time. When this occurs, one of the new equilibrium values (either price or quantity) is indeterminate, because you do not know how far each curve shifts.

For example, in the textbook market, suppose college attendance rises (demand increases) while the price of paper rises (supply decreases).

• Demand increase: price up, quantity up.
• Supply decrease: price up, quantity down.

The price effects agree, so price clearly rises. The quantity effects clash, so quantity is indeterminate. If the demand increase outweighs the supply decrease, quantity rises; if not, it falls. Without knowing the relative sizes, you cannot say for sure.

The pattern is the same for any double shift: when both shifts push a variable in the same direction, that variable is determinate; when they clash, that variable is indeterminate. If you can graph the two shifts, you can usually reason out the result without memorizing a chart.

How to Use This on the AP Microeconomics Exam

MCQ

• Decide first whether the question describes a shift of a curve or a movement along it. A price change alone causes a movement; a determinant change causes a shift.
• For shifts, apply the rules: demand shifts move P and Q the same direction; supply shifts move them in opposite directions.
• For a disequilibrium price, identify whether it is above (surplus) or below (shortage) equilibrium, then predict which way price will move.

Free Response

• Draw a correctly labeled supply and demand graph. Label both axes (price and quantity) and both curves.
• Show the shift clearly with a new curve and an arrow, and label the original and new equilibrium points (P1, Q1 to P2, Q2).
• State the direction of change for price and quantity, and explain the cause using the correct determinant.
• If asked about surplus areas or deadweight loss, identify the correct triangles and show the area calculation when given numbers.

Problem Solving

• When computing changes in consumer or producer surplus, use the area of the correct triangle (one-half times base times height) and confirm you are measuring the right region.
• Watch for elasticity clues: a more inelastic curve absorbs more of a price change, while a more elastic curve absorbs more of a quantity change.

Common Trap

• In a double shift, always check which effect is shared and which clashes before answering. Naming the indeterminate variable is the whole point.

Common Misconceptions

• A shortage is not the same as low supply. A shortage means Qd exceeds Qs at the current price, usually because the price is below equilibrium, not because supply is small.
• A surplus is not the same as a curve shift. A surplus is a price above equilibrium on a single set of curves; a shift creates a whole new equilibrium.
• Shifting a curve does not create deadweight loss. The market still clears at the new equilibrium. Deadweight loss appears when a price is held away from equilibrium.
• "Change in demand" and "change in quantity demanded" are different. A determinant shifts the whole demand curve; a price change moves you along it.
• In a double shift, you cannot just guess the indeterminate variable. If the two effects clash, that variable truly cannot be determined without more information.
• Producer surplus is about what sellers receive versus what they are willing to accept, not what they pay.

Related AP Microeconomics Guides

• 2.1 Demand
• 2.3 Price Elasticity of Demand
• 2.6 Market Equilibrium and Consumer and Producer Surplus
• 2.8 The Effects of Government Intervention in Markets
• 2.2 Supply
• 2.5 Other Elasticities