Question

Why do changes in demand or supply cause disequilibrium?

Short answer

Changes in demand or supply create shortages or surpluses, disrupting market equilibrium.

Step-by-step solution

Understanding Equilibrium

Equilibrium in a market occurs when the quantity demanded by consumers equals the quantity supplied by producers. At this point, the market price stabilizes, and there is no tendency for change.

Defining Demand and Supply Changes

Changes in demand refer to shifts in the desire of consumers to buy goods at different prices, while changes in supply involve shifts in the production and availability of goods by producers at different prices.

Analyzing Demand-Side Changes

When demand increases (shifts to the right), at the current price, consumers want to buy more than is available, creating a shortage. Conversely, when demand decreases (shifts to the left), at the current price, fewer goods are wanted, leading to a surplus.

Analyzing Supply-Side Changes

When supply increases (shifts to the right), more goods are available at the current price, which can lead to a surplus if demand doesn't also increase. When supply decreases (shifts to the left), fewer goods are available, potentially creating a shortage if demand doesn't decrease as well.

Resulting Disequilibrium

Any change in demand or supply disrupts the balance of equal quantity demanded and supplied, leading to either excess demand (shortages) or excess supply (surpluses), thus causing disequilibrium.

Key concepts

Demand and Supply

Demand and supply are foundational concepts in economics, representing the relationship between consumers and producers in a market. **Demand** refers to how much of a product consumers are willing and able to purchase at different prices. When prices are lower, people generally want to buy more; this is known as the law of demand.
Conversely, **supply** describes how much of a product producers are willing and able to sell at various price levels. As prices rise, producers are usually more inclined to supply more because they can earn higher profits, which is known as the law of supply.

• Demand increases: Shifts the demand curve to the right.
• Demand decreases: Shifts the demand curve to the left.
• Supply increases: Shifts the supply curve to the right.
• Supply decreases: Shifts the supply curve to the left.

Understanding these changes is crucial because they directly affect the market equilibrium - where demand equals supply. When demand or supply shifts, the equilibrium price and quantity will change, leading to potential market disequilibria.

Disequilibrium

Disequilibrium occurs when there is an imbalance between demand and supply in the market. This is a temporary state where the quantity demanded doesn't match the quantity supplied. It happens when there is a shift in either demand or supply, and the market hasn't yet adjusted to a new equilibrium.
For instance, if demand sharply increases due to a trend or a shortage in supply, prices may suddenly no longer reflect the market's situation. This causes either surplus or shortage as the market struggles to find a new point of balance.
There are several reasons for disequilibrium:

• Sudden change in consumer taste (affecting demand).
• Technological innovations (affecting supply).
• Government interventions such as taxes or subsidies.

Ultimately, disequilibrium is typically corrected over time as prices adjust, signaling to producers to either increase supply in the case of a shortage or decrease supply during a surplus.

Shortage and Surplus

A shortage in the market occurs when demand exceeds supply at the current price. This results in consumers wanting to purchase more than producers are willing to sell. In such cases, prices are likely to increase, as consumers compete to obtain the limited products available. This rise in prices is a signal for producers to increase production.
Conversely, a surplus arises when supply exceeds demand at the current price. Producers have more goods than consumers are willing to buy. As a result, prices usually decrease to attract more buyers or to clear the inventory.

• Shortage is associated with excess demand.
• Surplus is associated with excess supply.

These situations exemplify the dynamic nature of markets. Although they represent states of disequilibrium, they prompt adjustments that guide the market back towards equilibrium, where supply and demand are balanced once again.