Question

Explain why fewer exchanges are made when a disequilibrium price (below the equilibrium price) exists than when the equilibrium price exists.

Short answer

When a disequilibrium price exists below the equilibrium price, fewer exchanges are made due to the presence of an excess demand. Consumers want to purchase more than producers are willing to supply at this lower price, which results in this lower number of exchanges. In contrast, at the equilibrium price, the quantity supplied equals the quantity demanded, allowing for more exchanges to occur.

Step-by-step solution

Understanding of Disequilibrium

Disequilibrium occurs when the price in the market does not match the equilibrium price. The equilibrium price, also known as the market-clearing price, is the price at which the quantity demanded equals the quantity supplied. When the price is lower than the equilibrium price, this results in a disequilibrium, specifically a shortage or excess demand.

Understand Excess Demand

Excess demand occurs when the price is below the equilibrium price, leading to the quantity demanded being higher than the quantity supplied. Due to such a price mismatch, consumers would want to buy more of the product or service than suppliers are willing to produce and provide at the below equilibrium price.

Correlation between Exchanges and Disequilibrium

As a result, there are fewer exchanges happening, as suppliers are not willing to supply the additional goods or services demanded by consumers at the lower price. Hence, via the mechanism of supply and demand, less trade occurs compared to the situation where the price is at its equilibrium.