key term - Disequilibrium

Definition

Disequilibrium refers to a state of imbalance or lack of equilibrium in a system, often used in the context of economic markets. It describes a situation where the supply and demand for a good or service are not in harmony, leading to an unstable or fluctuating market condition.

5 Must Know Facts For Your Next Test

1. Disequilibrium can occur due to changes in supply or demand, such as shifts in consumer preferences, changes in production costs, or the introduction of new competitors.
2. Disequilibrium can lead to shortages or surpluses in the market, which can result in price fluctuations and inefficient resource allocation.
3. Governments and policymakers may intervene in markets experiencing disequilibrium to restore equilibrium, such as through price controls, subsidies, or other regulatory measures.
4. The concept of disequilibrium is central to understanding the dynamics of microeconomics, particularly the behavior of businesses and consumers in response to market changes.
5. Disequilibrium can also occur in other systems, such as labor markets, financial markets, or even in the context of international trade and exchange rates.

Review Questions

• Explain how disequilibrium can arise in a market and the potential consequences.
  • Disequilibrium can arise in a market due to changes in supply or demand. For example, if there is an increase in demand for a product without a corresponding increase in supply, the market will experience a shortage, leading to a rise in prices. Conversely, if there is an increase in supply without a matching increase in demand, the market will experience a surplus, resulting in a decrease in prices. These imbalances can lead to inefficient resource allocation, price fluctuations, and the need for government intervention to restore equilibrium.
• Describe the role of the market clearing price in the context of disequilibrium.
  • The market clearing price is the price at which the quantity supplied and the quantity demanded are equal, resulting in a state of equilibrium in the market. When a market experiences disequilibrium, the market clearing price is not achieved, leading to either a shortage or a surplus. Policymakers and economists often focus on identifying the market clearing price as a means of understanding and addressing disequilibrium in the market, as restoring the market clearing price can help to re-establish equilibrium and improve the efficient allocation of resources.
• Analyze how government intervention can be used to address disequilibrium in a market.
  • Governments can intervene in markets experiencing disequilibrium in various ways to help restore equilibrium. For example, they can implement price controls, such as setting a price ceiling to address a shortage or a price floor to address a surplus. Governments can also provide subsidies to producers or consumers to shift the supply or demand curves and move the market closer to equilibrium. Additionally, governments may use regulatory measures, such as antitrust policies or trade policies, to address structural issues that contribute to disequilibrium. The effectiveness of government intervention in addressing disequilibrium depends on the specific market conditions and the policy tools used.

Related terms

Equilibrium: A state of balance or stability in a system, where the forces or factors involved are in a state of equilibrium, such as the point where the quantity supplied and the quantity demanded for a good or service are equal.

Market Clearing Price: The price at which the quantity supplied and the quantity demanded are equal, resulting in a state of equilibrium in the market.

Surplus:

A situation where the quantity supplied exceeds the quantity demanded, leading to a state of disequilibrium in the market.