Question

Explain the differences between the terms in each of these pairs: a. market equilibrium disequilibrium b. surplus shortage

Short answer

Market equilibrium involves balanced supply and demand, while disequilibrium does not. Surplus is excess supply, while shortage is excess demand.

Step-by-step solution

Understanding Market Equilibrium

Market equilibrium occurs when the quantity demanded by consumers equals the quantity supplied by producers. At this point, there is no tendency for the market price to change, as supply and demand are balanced.

Understanding Market Disequilibrium

Market disequilibrium happens when there is an imbalance between quantity demanded and quantity supplied at a given price. This can result in either a surplus or a shortage, causing the market price to move towards equilibrium.

Differences between Equilibrium and Disequilibrium

The main difference between market equilibrium and disequilibrium is balance versus imbalance. Whereas equilibrium is a stable state with no excess demand or supply, disequilibrium signifies an unstable state necessitating price adjustments.

Understanding Surplus

A surplus in a market occurs when the quantity supplied exceeds the quantity demanded at the current price, often leading to a decrease in price as sellers attempt to eliminate excess supply.

Understanding Shortage

A shortage happens when the quantity demanded is greater than the quantity supplied at the current price, typically resulting in a price increase as consumers compete to purchase the limited supply.

Differences between Surplus and Shortage

Surplus and shortage differ based on the inequality between supply and demand. A surplus indicates excess supply and downward pressure on price, whereas a shortage indicates excess demand and upward pressure on price.

Key concepts

Market Disequilibrium

Market disequilibrium is a situation where the market is out of balance. This means that the quantity of goods consumers want does not match the quantity of goods producers are supplying. When this happens, the market is not at rest and prices are likely to change.

There are two main types of market disequilibrium:

• **Surplus**: When there is more supply than demand, causing prices to fall.
• **Shortage**: When there is more demand than supply, causing prices to rise.

The market always tends to move towards equilibrium, where supply meets demand perfectly, but this process can take time and involves several dynamic adjustments.

Surplus and Shortage

Surplus and shortage are key concepts related to market disequilibrium. A **surplus** occurs when there is too much product available compared to what consumers want to buy. This typically results in producers lowering their prices to increase sales and clear out excess inventory.

On the flip side, a **shortage** emerges when the demand for a product exceeds the available supply. This situation is generally characterized by rising prices, as consumers are willing to pay more to obtain what's available, encouraging producers to supply more.

Both conditions create pressure for the market to return to equilibrium, where supply equals demand and eliminate the surplus or shortage.

Supply and Demand

Supply and demand are the fundamental forces driving all markets. **Supply** represents how much the market can offer, with quantities controlled by producers. As prices rise, more suppliers are willing to produce the good, assuming higher potential profits.

• Higher prices lead to increased supply.
• Lower prices result in decreased supply.

**Demand** explains how much of a product consumers want and their willingness to pay for it. Typically, as prices go up, the quantity demanded goes down, because consumers might choose alternatives or buy less.

• Lower prices lead to increased demand.
• Higher prices reduce demand.

Together, supply and demand determine the market price and the quantity of goods exchanged in the market. Achieving market equilibrium means finding the price point where the quantity supplied equals the quantity demanded.