1.7 Market Equilibrium, Disequilibrium, and Changes in Equilibrium

Equilibrium: where supply meets demand

Market equilibrium occurs where the supply and demand curves intersect, determining the equilibrium price and equilibrium quantity. At this point, the quantity buyers want equals the quantity sellers offer, so there is no natural tendency for price to change. This is where Qd = Qs.

Disequilibrium: surplus and shortage

If price is set above equilibrium, quantity supplied exceeds quantity demanded, creating a surplus, which pushes price down. If price is below equilibrium, quantity demanded exceeds quantity supplied, creating a shortage, which pushes price up. Markets self-correct toward equilibrium unless prevented (e.g., price controls).

Shifts vs. equilibrium changes

A shift in demand (price, quantity same direction) or supply (price, quantity opposite directions) changes equilibrium. When both curves shift simultaneously, one variable (price or quantity) becomes indeterminate without knowing the relative magnitude of the shifts — direction of the other can still often be determined.

Key terms

Market equilibrium

The price-quantity combination where quantity demanded equals quantity supplied (Qd = Qs).

Surplus

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

Shortage

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

Effect of demand increase (supply constant)

Equilibrium price and quantity both increase.

Effect of supply increase (demand constant)

Equilibrium price decreases, equilibrium quantity increases.

Try an AP-style question

What exists and what happens to price?

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