Topic 1.6 Notes – Market Equilibrium, Disequilibrium, and Changes in Equilibrium

1. Market Equilibrium

In a competitive market, equilibrium occurs where quantity demanded (Qd) equals quantity supplied (Qs).

That point is the intersection of the demand and supply curves, like the point where the upward-sloping supply curve and downward-sloping demand curve cross in the graph below.

Supply and demand at market equilibrium

At equilibrium:

• Equilibrium price (Pe) is the market-clearing price.
• Equilibrium quantity (Qe) is the amount bought and sold.
• There is no pressure for price to rise or fall.
• All buyers willing and able to pay Pe can purchase.
• All sellers willing and able to sell at Pe can sell.

Why this matters:

• It results from voluntary exchange.
• It maximizes total surplus
  • Consumer surplus = benefit to buyers
  • Producer surplus = benefit to sellers
• It is allocatively efficient in a competitive market.

Quick reminder:

• Demand slopes downward due to the law of demand.
• Supply slopes upward due to the law of supply.
• The intersection is always your anchor on MCQs and FRQs.

2. Disequilibrium Surpluses and Shortages

When price is not at equilibrium, Qd ≠ Qs. That’s disequilibrium.

Shortage

A shortage occurs when:

$$Q_{d} > Q_{s}$$

• Caused by a price below equilibrium
• Also called excess demand

On a graph:

• Price is set below Pe.
• Qd is larger than Qs.
• Shortage amount = Qd − Qs

Example calculation:
If at 5 dollars, Qd = 80 and Qs = 50 → shortage = 30 units.

What happens next:

1. Buyers compete.
2. Some offer higher prices.
3. Price rises.
4. As price rises:
   • Qd decreases (movement along demand)
   • Qs increases (movement along supply)

The market self-corrects toward Pe.

Real-world anchor:
Gasoline price ceilings in the 1970s during the energy crisis led to long lines and shortages because prices were held below equilibrium.

Surplus

A surplus occurs when:

$$Q_{s} > Q_{d}$$

• Caused by a price above equilibrium
• Also called excess supply

On a graph:

• Price is above Pe.
• Qs exceeds Qd.
• Surplus amount = Qs − Qd

Example calculation:
If at 12 dollars, Qs = 120 and Qd = 90 → surplus = 30 units.

What happens next:

1. Unsold goods pile up.
2. Sellers lower prices.
3. Price falls.
4. As price falls:
   • Qd increases
   • Qs decreases

The market again moves back to equilibrium.

Real-world anchor:
Agricultural price floors in the U.S., such as wheat supports, created persistent surpluses the government had to purchase and store.

The Core Adjustment Rule

• Shortage → price rises
• Surplus → price falls
• Price changes cause movement along curves, not shifts.

That distinction shows up constantly on tests.

3. How Shifts Create a New Equilibrium

If a determinant of demand or supply changes, the whole curve shifts. That creates a new intersection, new Pe, new Qe.

Four possible single shifts:

Pattern to memorize:

• Demand shifts → price and quantity move in the same direction
• Supply shifts → price and quantity move in opposite directions

That shortcut saves time on MCQs.

4. When Both Demand and Supply Shift

Sometimes both curves move.

What you can usually say with certainty:

• If both increase → quantity increases
• If both decrease → quantity decreases

Price may be indeterminate. It depends on which shift is larger.

Example:

• Strong economic growth increases demand.
• New technology increases supply.
• Quantity definitely rises.
• Price depends on relative size of shifts.

On FRQs, if price is unclear, write that it is indeterminate. Guessing loses points.