In this lesson summary review and remind yourself of the key terms and graphs used in the analysis of markets. Topics include how to use a market model to predict how price and quantity change in a market when demand changes, supply changes, or both supply and demand change.
In a competitive market, demand for and supply of a good or service determine the equilibrium price.
Equilibrium
MARKETS: Equilibrium is achieved at the price at which quantities demanded and supplied are equal. We can represent a market in equilibrium in a graph by showing the combined price and quantity at which the supply and demand curves intersect.
For example, imagine that sellers of squirrel repellant are willing to sell 500500 units of squirrel repellant at a price of $5dollar sign, 5 per can. If buyers are willing to buy 500500 units of squirrel repellent at that price, this market would be in equilibrium at the price of $5dollar sign, 5 and at the quantity of 500500 cans.
Disequilibrium
Whenever markets experience imbalances—creating disequilibrium prices, surpluses, and shortages—market forces drive prices toward equilibrium.
A surplus exists when the price is above equilibrium, which encourages sellers to lower their prices to eliminate the surplus.
A shortage will exist at any price below equilibrium, which leads to the price of the good increasing.
For example, imagine the price of dragon repellent is currently $6dollar sign, 6 per can. People only want to buy 400400 cans of dragon repellent, but the sellers are willing to sell 600600 cans at that price. This creates a surplus because there are unsold units. Sellers will lower their prices to attract buyers for their unsold cans of dragon repellant.
Changes in equilibrium
Changes in the determinants of supply and/or demand result in a new equilibrium price and quantity. When there is a change in supply or demand, the old price will no longer be an equilibrium. Instead, there will be a shortage or surplus, and price will subsequently adjust until there is a new equilibrium.
For example, suppose there is a sudden invasion of aggressive unicorns. There will be more people who want to buy unicorn repellent at all possible prices, causing demand to increase. At the original price, there will be a shortage of unicorn repellant, signaling sellers to increase the price until the quantity supplied and quantity demanded are once again equal.
We can summarize the changes in equilibrium with the following table:
| Change | Change in P∗P, start superscript, times, end superscript | Change in Q∗Q, start superscript, times, end superscript |
|---|---|---|
| Supply increases ↑\uparrow (shifts right) | P ↓\downarrow | Q ↑\uparrow |
| Supply decreases ↓\downarrow (shifts left) | P ↑\uparrow | Q ↓\downarrow |
| Demand increases ↑\uparrow (shifts right) | P ↑\uparrow | Q ↑\uparrow |
| Demand decreases ↓\downarrow (shifts left) | P ↓\downarrow | Q ↓\downarrow |
| Demand Increases, Supply increases | P ↕\updownarrow (indeterminate) | Q ↑\uparrow |
| Demand Increases, Supply decreases | P ↑\uparrow | Q ↕\updownarrow (indeterminate) |
| Demand decreases, Supply increases | P ↓\downarrow | Q ↕\updownarrow (indeterminate) |
| Demand decreases, Supply decreases | P ↕\updownarrow (indeterminate) | Q ↓\downarrow |
Key Terms
| Term | Definition |
|---|---|
| market | an interaction of buyers and sellers where goods, services, or resources are exchanged |
| shortage | when the quantity demanded of a good, service, or resource is greater than the quantity supplied |
| surplus | when the quantity supplied of a good, service, or resource is greater than the quantity demanded |
| equilibrium | in a market setting, an equilibrium occurs when price has adjusted until quantity supplied is equal to quantity demanded |
| disequilibrium | in a market setting, disequilibrium occurs when quantity supplied is not equal to the quantity demanded; when a market is experiencing a disequilibrium, there will be either a shortage or a surplus. |
| equilibrium price | the price in a market at which the quantity demanded and the quantity supplied of a good are equal to one another; this is also called the “market clearing price.” |
| equilibrium quantity | the quantity that will be sold and purchased at the equilibrium price |
Key Graphical Models - The market model
Consider the market for giant shiny salamander stickers, given in Figure 11. Currently, the equilibrium price of these stickers is $5dollar sign, 5, and the equilibrium quantity is 33.
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Changes in Supply
Suppose the price of glitter, which is used to make giant shiny salamander stickers, increases so that it now costs the seller $2dollar sign, 2 more per sticker to produce them. This will cause the supply of this good to decrease. To see the impact a decrease in supply will have on the equilibrium price and quantity, grab the interactive supply curve and shift it to the left until the price is $2dollar sign, 2 higher at every level of output (the new supply curve should start at $4dollar sign, 4).
What change did you notice? If you adjusted the graph correctly, you should see the equilibrium price increases to $6dollar sign, 6, and the equilibrium quantity in this market decreases to 22 stickers.
Now instead, suppose someone invents a new way to produce shiny salamander stickers so there is less waste and fewer resources are needed to produce them. This would result in an increase in the supply of shiny salamander stickers. To see the impact an increase in supply will have on the equilibrium price and quantity, grab the interactive supply curve and drag it to the right so that at every quantity the price is $2dollar sign, 2 lower (the new supply curve should start at $0dollar sign, 0).
How did you do? If you adjusted the graph correctly, you should see the equilibrium price decreases to $4dollar sign, 4 and equilibrium quantity increases to 44 stickers.
Changes in demand
Suppose a famous, trendsetting actress starts wearing giant shiny salamander stickers, which makes them instantly the must-have accessory. This would cause the demand for this good to increase. To see the impact on equilibrium price and quantity in the market from an increase in demand, grab the demand curve Figure 22 and shift it to the right to represent an increase in demand.
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Changes in both demand and supply
When both supply and demand change at the same time, the impact on equilibrium price and quantity cannot be determined for certain without knowing which changed by a greater amount.
Suppose shiny salamander stickers fall out of popularity, and therefore the demand for them decreases. At the same time, the price of glitter goes up, which leads to a decrease in supply.
On the one hand, the decrease in demand should make price decrease and quantity demanded decrease.On the other hand, the decrease in supply should also make price __increase and quantity demanded decrease. That means we know for certain that the quantity of giant shiny salamander stickers will decrease. But what will happen to price?
In Figure 3, we see a decrease in supply and a decrease in demand. The effect on quantity is easy to determine (quantity will definitely decrease). On the other hand, it is hard to tell if the equilibrium price has increased, decreased, or stays the same. Because we cannot say which of these has happened with certainty, we say that the price change is indeterminate or ambiguous.
Figure 3: The market for giant shiny salamander stickers
Of course, when modeling changes in a graph it is possible to see changes in both equilibrium price and quantity when shifting both demand and supply (depending on how much each curve shifts). In the interactive graph below, move both demand and supply in different directions. Each time, move the equilibrium point to the new intersection of demand and supply. Try to create new equilibria at which:
- Price is higher and quantity is higher
- Price is higher and quantity is lower
- Price is lower and quantity is higher
- Price is lower and quantity is lower
Common Misperceptions
- When showing an equilibrium price and quantity, it is important to clearly label these on the appropriate axis, not just the interior of the graph. Remember that the point on either axis represents the market price and the market quantity, not a point in the middle of the graph.
- When both supply and demand change at the same time, we will not be able to make a statement about what happens to both price and quantity, one of these will be uncertain.
Discussion Questions
- When both supply and demand increase at the same time, why can't we tell what will happen to the equilibrium price?
- Can you think of an example of a good in your own life for which there was a shortage?
- What happened to the price of that good?
- Using a correctly labeled graph, show the impact on equilibrium price and quantity in the market for pumpkin spiced lattes if the cost of producing them increases.
[Explain]
(Video) Class 11 Economics Chapter 6 | Market Equilibrium - Introduction
FAQs
What is the market equilibrium and changes in market equilibrium? ›
Equilibrium is the state in which market supply and demand balance each other, and as a result prices become stable. Generally, an over-supply of goods or services causes prices to go down, which results in higher demand—while an under-supply or shortage causes prices to go up resulting in less demand.
What is the difference between market equilibrium and disequilibrium? ›The balancing effect of supply and demand results in a state of equilibrium. Disequilibrium occurs when this adjustment of supply, demand, and/or prices does not work as theorized.
What is a market equilibrium disequilibrium? ›Market disequilibrium occurs when the quantity demanded either exceeds or falls short of the quantity supplied, thus leading to a shortage or surplus.
What causes changes in market equilibrium? ›The changes in the market equilibrium is caused due to the changes in the demand and supply.
What is the meaning of disequilibrium? ›What is Disequilibrium? Disequilibrium is a state within a market-based economy in which the economic forces of supply and demand are unbalanced. It is a state where internal or external forces prevent the market from reaching equilibrium, and the market falls out of balance over time.
What is market equilibrium How do the changes in demand and supply affect the market equilibrium? ›As you can see, an increase in demand causes the equilibrium price to rise. On the other hand, a decrease in demand causes the equilibrium price to fall. An increase in supply causes the equilibrium price to fall, while a decrease in supply causes the equilibrium price to rise.
What are the two types of market disequilibrium? ›Market disequilibrium is an imbalance between supply and demand - such that supply exceeds the level of demand or demand exceeds the available supply. Types of disequilibrium are labor market disequilibrium and balance of payments disequilibrium.
What are examples of disequilibrium in economics? ›For instance, the government may fix a minimum wage rate for laborers. If this minimum wage rate is more than the equilibrium price for laborers, the quantity of labor supplied increases. This is referred to as the disequilibrium of the labor market.
What is the difference between market equilibrium and disequilibrium quizlet? ›Market equilibrium occurs when the quantity demanded and the quantity supplied at a particular price are equal. Disequilibrium occurs when quantity demanded and quantity supplied are not in balance.
What are changes in equilibrium? ›Changes in the determinants of supply and/or demand result in a new equilibrium price and quantity. When there is a change in supply or demand, the old price will no longer be an equilibrium. Instead, there will be a shortage or surplus, and price will subsequently adjust until there is a new equilibrium.
What are the 3 reasons for a change in equilibrium economics? ›
A decrease in demand will cause the equilibrium price to fall; quantity supplied will decrease. An increase in supply, all other things unchanged, will cause the equilibrium price to fall; quantity demanded will increase. A decrease in supply will cause the equilibrium price to rise; quantity demanded will decrease.
What is an example of a market equilibrium situation? ›Example #1
During summer, there is a great demand and equal supply. Hence the markets are at equilibrium. The supply will start falling post-summer season, and demand might remain the same. Company A will increase the prices to take advantage and control the demand.
what two factors can push a market into disequilibrium? a shift in the entire demand curve, or a shift in the entire supply curve.
What two conditions lead to disequilibrium in the market? ›Identify two conditions that can lead to disequilibrium in a free market. When the market price is too high or too low. when the quantity supplied is too high or too low.
What are the effects of market disequilibrium? ›Disequilibrium in one market has a spillover effect on another market. For example, the excess supply of goods reduces the demand for labor. Firms will not hire workers if the output cannot be sold. The excess supply of labor reduces the demand for goods.
What is one of the most common causes of disequilibrium? ›A feeling of chronic disequilibrium can be caused by bilateral loss of labyrinthine function. This can be due to degenerative disorders, ototoxic drugs, bilateral labyrinthitis, previous meningitis, or head injury.
What is the theory of disequilibrium? ›Disequilibrium theory is an approach to reinforcement that reconsiders the putative response strengthening prowess of stimuli. This disequilibrium approach—the pinnacle of the response deprivation hypothesis—reliably predicts changes in behavior without reference to a response strengthening process.
What creates disequilibrium? ›Disequilibrium occurs when the markets fail to clear and find their final equilibrium point. Disequilibrium could occur if the price was below the market equilibrium price causing demand to be greater than supply, and therefore causing a shortage.
What are the four basic causes for a shift in market equilibrium? ›- Demand shifts to the left. A decrease in demand shifts the demand curve to the left and reduces price and output.
- Supply shifts to the right. An increase in supply shifts the supply curve to the right, which reduces price and increases output.
- Supply shifts to the left.
Market prices are dependent upon the interaction of demand and supply. An equilibrium price is a balance of demand and supply factors. There is a tendency for prices to return to this equilibrium unless some characteristics of demand or supply change.
Why is the market equilibrium important? ›
Equilibrium is important to create both a balanced market and an efficient market. If a market is at its equilibrium price and quantity, then it has no reason to move away from that point, because it's balancing the quantity supplied and the quantity demanded.
Is market disequilibrium market failure? ›Market failure occurs when there is a state of disequilibrium in the market due to market distortion. It takes place when the quantity of goods or services supplied is not equal to the quantity of goods or services demanded.
What are the 4 main types in the disequilibrium in balance of payment? ›Main types of disequilibrium in the balance of payments are: i. Cyclical Disequilibrium ii. Structural Disequilibrium iii. Short-run Disequilibrium iv.
What are the measures to correct disequilibrium? ›- (i) Export promotion: Exports should be encouraged by granting various bounties to manufacturers and exporters. ...
- (ii) Import: Restrictions and Import Substitution are other measures of correcting disequilibrium.
- (iii) Reducing inflation: ...
- (iv) Exchange control:
Disequilibrium refers to unsteadiness, imbalance, or loss of equilibrium that is often accompanied by spatial disorientation. The feeling of disequilibrium without the spinning sensation is sometimes related to the inner ear while vertigo is frequently due to an inner ear disorder.
What are the characteristics of equilibrium and disequilibrium in economics? ›The definition of equilibrium in the physical sciences as a state of balance between opposing forces or action applies without modification in the field of economic theory. Disequilibrium in turn simply becomes the absence of a stale of balance—a state in which opposing forces produce imbalance.
What is an example of a market equilibrium? ›Example #1
Company A sells Mangoes. During summer, there is a great demand and equal supply. Hence the markets are at equilibrium. The supply will start falling post-summer season, and demand might remain the same.
Therefore, equilibrium in a perfectly competitive market can be defined alternatively as zero excess demand-zero excess supply situation. Whenever market supply is not equal to market demand, and hence the market is not in equilibrium, there will be a tendency for the price to change.
What is an example of market equilibrium change? ›For example, imagine that sellers of squirrel repellant are willing to sell 500 units of squirrel repellant at a price of $5 per can. If buyers are willing to buy 500 units of squirrel repellent at that price, this market would be in equilibrium at the price of $5 and at the quantity of 500 cans.
What determines the market equilibrium? ›Market prices are dependent upon the interaction of demand and supply. An equilibrium price is a balance of demand and supply factors. There is a tendency for prices to return to this equilibrium unless some characteristics of demand or supply change.
What is market equilibrium simple? ›
Market equilibrium is a market state where the supply in the market is equal to the demand in the market. The equilibrium price is the price of a good or service when the supply of it is equal to the demand for it in the market.
Who benefits from market equilibrium? ›Once the market reaches its equilibrium, all buyers and sellers are satisfied and there is no upward or downward pressure on the price. Why is Market Equilibrium a Desired Outcome?
What is the good market equilibrium? ›The goods market is in equilibrium when aggregate demand is equal to income. The aggregate demand is determined by consumption demand and investment demand. In the Keynesian model of goods market equilibrium we also now introduce the rate of interest as an important determinant of investment.
What is the conclusion of the market equilibrium? ›Equilibrium Conclusion
Equilibrium is a situation where the products or services demanded in a market are equal to the products or services that are supplied in the market. Economists use equilibrium to explain market behavior.