Unit 2: Supply and Demand
2.7: Market Disequilibrium and Changes in Equilibrium
Markets naturally fluctuate away from equilibrium, which causes market disequilibrium.
When there is an increase in the price level, firms have an incentive to supply a greater quantity in order to maximize profits. However, this also causes the quantity demanded to decrease as consumers are less willing or able to buy. This market condition where QS > QD at a price higher than equilibrium is known as a market surplus (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 market condition where QD > QS at a price lower than equilibrium is known as a market shortage (see graph below).
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. This means that producers are making more goods than consumers are willing to buy.
Changes in Market Equilibrium
When the determinants of demand (I-N-S-E-C-T) and the determinants of supply (R-O-T-T-E-N) cause changes in either demand or supply, then there is a change in market equilibrium. There are four potential changes that cause market price and quantity to change:
Double Shifts of Supply and Demand
In some situations, you will have both demand and supply change at the same time. There are some rules for these cases that determine what happens to the equilibrium price and quantity. When these double shifts take place, either price or quantity will be indeterminate (meaning we do not know exactly what is going to happen to it).