MARKET EQUILIBRIUM, DISEQUILIBRIUM AND EFFECT OF CHANGES IN DEMAND AND SUPPLY

The relationship between market demand and supply is aimed at determining the equilibrium in the market.

The equilibrium is the point where the upward-sloping supply curve intersects the downward-sloping demand curve.

This means the price and quantity of the sellers are the same as that of the buyer.

Simply said, equilibrium is a situation in which the quantity and price offered by the sellers are the same as the quantity and price of the buyers

The price where this occurs is called the equilibrium price or market clearing price, and the quantity where it occurs is called the equilibrium quantity or market-clearing quantity

Example

The monthly demand and supply curve for shoes is illustrated below.

Price (€)	Quantity supplied	Quantity demanded
800	1000	7000
1000	2000	6000
1200	3000	5000
1400	4000	4000
1600	5000	3000
1800	6000	2000

As can be seen, the equilibrium price is €1400 and the equilibrium quantity is 4000.

At the price of €1400, sellers were willing to sell 4000 shoes, which is the same quantity that the buyers want.

Therefore, there will be no excess demand or supply at €1400. This means that there is no 'leftover', and the market has cleared.

As you will see below, we can visualize this on a graph.

Disequilibrium

Disequilibrium occurs when the quantity demanded does not always equal the quantity supplied.

It occurs when the price charged is above or below the equilibrium price.

There will be excess supply if the price is set above the equilibrium price.

There will be excess demand if it is charged below the equilibrium price

Excess supply(or surplus)

This is a situation where the quantity supplied exceeds the quantity demanded at a prevailing price. This will result in a surplus.

Excess supply is usually associated with high prices. High prices will lead to a diminished quantity demanded and an enhanced quantity supplied.

Why enhanced quantity supplied?

The law of supply states that "the higher the price, the higher the quantity supplied and vice versa. Hence, we would have an enhanced quantity supplied".

If you are not familiar with supply, see my blog post on supply

Why diminished the quantity demanded?

The law of demand states that "the higher the price, the lower the quantity demanded and vice versa. Hence, we would have a diminished quantity demanded".

If you are not yet familiar with demand, refer to this post here

Going by our earlier example, when the price was €1600, the quantity of shoes demanded is 3000 and the quantity supplied is 5000. This signifies that sellers are willing to sell 2000 more shoes than consumers are willing to buy.

This would cause a surplus in the market.

But, if the seller wants to sell all his shoes, what will he do?

He will have to reduce the price of his shoes so that it attracts buyers. This price reduction would lead to a higher quantity demanded.

However, the suppliers can not produce much(due to the low prices).

Eventually, the market will be balanced as price and quantity would move back to their equilibrium.

So, excess supply will induce sellers into reducing prices so that supply matches the available demand, resulting in market equilibrium.

Excess demand (or shortage)

This is a situation where quantity demanded exceeds quantity supplied at prevailing prices, thereby, leading to a shortage. Excess supply is usually correlated with low prices.

Now, think of what would happen if the price was €1200. The number of shoes demanded(5000) is 2000 more than the number of shoes supplied(3000).

In this case, buyers want more than 2000 more shoes than the quantity offered by suppliers.

Suppliers, knowing that there is a shortage, would use the opportunity to increase their profit margin by selling at higher prices.

However, as the price rises, the quantity demanded will fall (law of demand). Once again, the market will adjust to its equilibrium point.

Note, that this process of adjustment does not always happen instantly, Some may take a very long time.

The point is that economic pressures will always cause the market to move back to its equilibrium quantity and price.

Changes In Equilibrium

So far, we have been looking at the effect of price changes on the market quantity.

However, a price change will not shift the equilibrium point, it will only cause excess demand and excess supply.

So, what causes the equilibrium to shift?

Non-price Factors!!!

Like I told you before, a change in non-price factors will cause an entire shift in the positions of the demand and supply curve.

A shift in the position of the demand and supply curve will mean that the equilibrium point would move to a new point.

For example, if schools were shut down for months, many students may not buy a pen, as illustrated in our new schedule.

Price (€)	Quantity supplied	Quantity demanded	New quantity demanded
800	1000	7000	5000
1000	2000	6000	4000
1200	3000	5000	3000
1400	4000	4000	2000
1600	5000	3000	1000
1800	6000	2000	500

As you can see, the equilibrium price and quantity( which initially were,€1600 and 4000 respectively) are re-established as €1200 and 3000 respectively.

Related post

Impacts of changes in demand and supply on the equilibrium

There are eight causes of equilibrium price and quantity changes which are:

1. Increase in demand while supply remains constant: When demand increases, the equilibrium price and quantity will also increase. The accompanying diagram illustrates this: