1.7 Market Equilibrium, Disequilibrium, and Changes in Equilibrium

Equilibrium: where supply meets demand

Equilibrium is the price-quantity point where the supply and demand curves intersect. At equilibrium price, quantity supplied equals quantity demanded — no shortage or surplus exists, and there's no natural pressure for price to change. This is the market's stable, self-correcting resting point.

Disequilibrium: shortages and surpluses

If price is set above equilibrium, quantity supplied exceeds quantity demanded, creating a surplus, which pushes price down. If price is set below equilibrium, quantity demanded exceeds quantity supplied, creating a shortage, which pushes price up. Markets naturally adjust back toward equilibrium unless something (like price controls) prevents it.

Shifts change equilibrium

A shift of the demand curve (right = increase, left = decrease) moves equilibrium price and quantity in the same direction. A shift of the supply curve (right = increase, left = decrease) moves equilibrium price and quantity in opposite directions. When both curves shift, combine the effects to predict the new equilibrium.

Key terms

Equilibrium price

The price at which quantity supplied equals quantity demanded; no shortage or surplus exists.

Surplus

Occurs when quantity supplied exceeds quantity demanded, usually when price is above equilibrium; pushes price down.

Shortage

Occurs when quantity demanded exceeds quantity supplied, usually when price is below equilibrium; pushes price up.

Effect of demand shift on equilibrium

Demand and equilibrium price/quantity move in the same direction (increase in demand → higher price and quantity).

Effect of supply shift on equilibrium

Supply and equilibrium quantity move in the same direction, but supply and equilibrium price move in opposite directions.

Try an AP-style question

What exists and what happens to price?

1. Equilibrium; no change
2. Surplus of 30; price falls
3. Shortage of 30; price rises
4. Surplus of 30; price rises