Change in Market Equilibrium

Definition

A change in market equilibrium occurs when there is a shift in the supply or demand curves, resulting in a new equilibrium price and quantity in the market. This change can happen due to various factors, such as consumer preferences, technology advancements, or changes in resource availability, which alter the balance between supply and demand. Understanding these shifts is crucial as they directly affect market efficiency and can lead to either surplus or shortage situations.

5 Must Know Facts For Your Next Test

1. When there is an increase in demand while supply remains unchanged, the equilibrium price will rise, leading to a higher quantity sold.
2. Conversely, if there is an increase in supply with constant demand, the equilibrium price will fall, causing an increase in quantity sold.
3. External factors like government policies, seasonal changes, and global events can lead to significant shifts in either supply or demand.
4. A change in consumer tastes or income levels can lead to a shift in the demand curve, impacting the overall market equilibrium.
5. In cases of market disequilibrium, corrective measures can be taken through price adjustments that naturally steer the market back toward equilibrium.

Review Questions

• What factors can cause a shift in market equilibrium, and how does this impact prices?
  • Factors such as changes in consumer preferences, income levels, and technology can lead to shifts in either supply or demand curves. For example, if a new technology reduces production costs, supply will increase, causing the equilibrium price to drop. Similarly, if a product becomes trendy, demand may increase, pushing prices higher. Understanding these shifts helps predict how prices will react in different market conditions.
• Discuss how government interventions can influence market equilibrium and potentially lead to disequilibrium.
  • Government interventions such as price ceilings or floors can distort natural market dynamics and create disequilibrium. For example, setting a price ceiling below the equilibrium price can lead to shortages because suppliers may reduce their output due to lower profitability. Conversely, imposing a price floor above equilibrium can cause surpluses as suppliers produce more than consumers are willing to buy at that price. These interventions often require further actions to restore balance.
• Evaluate the long-term implications of persistent market disequilibrium on an economy's efficiency and resource allocation.
  • Persistent market disequilibrium can significantly hinder an economy's efficiency by causing misallocation of resources. For instance, if a surplus continues over time, resources may be wasted on overproduction while consumers may seek alternatives. On the other hand, a prolonged shortage might lead to inflationary pressures as prices continue to rise due to scarcity. Over time, these inefficiencies can slow economic growth and affect overall welfare by preventing markets from functioning optimally.

Related terms

Supply and Demand:

The fundamental economic model that describes how the quantity of a good or service available (supply) interacts with the desire of consumers to purchase it (demand) to determine prices.

Equilibrium Price:

The price at which the quantity of a good demanded by consumers equals the quantity supplied by producers, resulting in no surplus or shortage.

Market Disequilibrium:

A situation where the quantity demanded does not equal the quantity supplied, leading to either excess demand (shortage) or excess supply (surplus) in the market.