2.6 Market Equilibrium, Disequilibrium, and Changes in Equilibrium

Finding equilibrium

Market equilibrium occurs where the supply and demand curves intersect, giving the equilibrium price and equilibrium quantity. At this point, quantity supplied equals quantity demanded, and there is no tendency for price to change. It's the market-clearing price where buyers and sellers agree.

Disequilibrium: surplus and shortage

If price is set above equilibrium, quantity supplied > quantity demanded, creating a surplus; sellers cut prices to clear excess inventory. If price is below equilibrium, quantity demanded > quantity supplied, creating a shortage; buyers bid prices up. Market forces push price back toward equilibrium.

Shifts vs. equilibrium changes

A shift in demand or supply (not price) changes equilibrium. Increased demand raises both equilibrium price and quantity; decreased demand lowers both. Increased supply lowers price but raises quantity; decreased supply raises price but lowers quantity. When both curves shift, use graphs to determine the net effect—one variable (price or quantity) may be indeterminate.

Key terms

Market equilibrium

The price and quantity where quantity supplied equals quantity demanded; no tendency for price to change.

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 increased demand on equilibrium

Shifts demand right; equilibrium price and quantity both increase (supply constant).

Effect of decreased supply on equilibrium

Shifts supply left; equilibrium price increases and quantity decreases (demand constant).

Try an AP-style question

What is the equilibrium price?

1. $40
2. $30
3. $20
4. $45