Question

What is the relationship between quantity demanded and quantity supplied at equilibrium? What is the relationship when there is a shortage? What is the relationship when there is a surplus?

Short answer

At equilibrium, the relationship between quantity demanded and quantity supplied is that they are equal, meaning the market is balanced. During a shortage, the quantity demanded is greater than the quantity supplied, resulting from a price below the equilibrium price. Conversely, during a surplus, the quantity supplied is greater than the quantity demanded, caused by a price above the equilibrium price. In both shortage and surplus scenarios, producers adjust prices to bring the market back to equilibrium.

Step-by-step solution

1. Understanding Equilibrium

Equilibrium occurs when the quantity demanded equals the quantity supplied in a market. In other words, at equilibrium, there is neither a shortage nor a surplus of goods and services. The market-clearing price (also known as the equilibrium price) is the price at which these quantities are equal.

2. Relationship between Quantity Demanded and Quantity Supplied at Equilibrium

At equilibrium, the relationship between quantity demanded and quantity supplied is that they are equal. This means that the quantity of goods and services that consumers are willing and able to purchase at the equilibrium price exactly matches the quantity that producers are willing and able to supply at that same price.

3. Understanding Shortage

A shortage occurs when the quantity demanded exceeds the quantity supplied at a specific price. This situation usually arises when the price of the goods or services is below the market-clearing price or equilibrium price.

4. Relationship between Quantity Demanded and Quantity Supplied during a Shortage

During a shortage, the relationship between quantity demanded and quantity supplied is that the quantity demanded is greater than the quantity supplied. This means that consumers are willing and able to purchase more goods and services at the current price than what is available for sale. Producers may respond by increasing the price until the quantity demanded equals the quantity supplied (i.e., until the market reaches equilibrium).

5. Understanding Surplus

A surplus occurs when the quantity supplied exceeds the quantity demanded at a specific price. This situation usually arises when the price of the goods or services is above the market-clearing price or equilibrium price.

6. Relationship between Quantity Demanded and Quantity Supplied during a Surplus

During a surplus, the relationship between quantity demanded and quantity supplied is that the quantity supplied is greater than the quantity demanded. This means that producers are willing and able to supply more goods and services at the current price than what consumers are willing and able to purchase. Producers may respond by decreasing the price until the quantity demanded equals the quantity supplied (i.e., until the market reaches equilibrium).