Market Equilibrium & Disequilibrium (SL IB Economics)

Revision Note

Steve Vorster

Expertise

Economics & Business Subject Lead

Market Equilibrium

  • In a market system, prices for goods/services are determined by the interaction of demand and supply 
    • A market is any place that brings buyers and sellers together
    • Markets can be physical (e.g. McDonald's) or virtual (e.g. eBay)

  • Buyers and sellers meet to trade at an agreed price
    • Buyers agree the price by purchasing the good/service
    • If they do not agree on the price then they do not purchase the good/service and are exercising their consumer sovereignty

  • Based on this interaction with buyers, sellers will gradually adjust their prices until there is an equilibrium price and quantity that works for both parties
    • At the equilibrium price, sellers will be satisfied with the rate/quantity of sales
    • At the equilibrium price, buyers are satisfied with the utility that the product provides

Equilibrium

  • Equilibrium in a market occurs when demand = supply

  • At this point, the price is called the equilibrium or market-clearing price
    • This is the price at which sellers are clearing (selling) their stock at an acceptable rate

1-2-6-market-equilibrium_edexcel-al-economics

A graph showing a market in equilibrium with a market clearing price at P & quantity at Q

  • Any price above or below P creates disequilibrium in this market
    • Disequilibrium occurs whenever there is excess demand or excess supply in a market

Market Disequilibrium

Disequilibrium: Excess Demand

  • Excess demand occurs when the demand is greater than the supply
    • It can occur when prices are too low or when demand is so high that supply cannot keep up with it

1-2-6-excess-demand_edexcel-al-economics

A graph that depicts the condition of excess demand in the market for electric scooters

Diagram Analysis

  • At a price of P1, the quantity demanded of electric scooters (Qd) is greater than the quantity supplied (Qs)
  • There is a shortage (excess demand) in the market equivalent to QsQd
     

Market Response

  • This market is in disequilibrium
    • Sellers are frustrated that products are selling so quickly at a price that is obviously too low
    • Some buyers are frustrated as they will not be able to purchase the product
  • Sellers realise they can increase prices and generate more revenue and profits
  • Sellers gradually raise prices
    • This causes a contraction in QD as some buyers no longer desire the good/service at a higher price
    • This causes an extension in QS as other sellers are more incentivised to supply at higher prices
  • In time, the market will have cleared the excess demand and arrive at a position of equilibrium, PeQe
    • Different markets take different lengths of time to resolve disequilibrium
    • E.g. Retail clothing can do so in a few days. Whereas the housing market may take several months, or even years

Disequilibrium: Excess Supply

  • Excess supply occurs when the supply is greater than the demand
    • It can occur when prices are too high or when demand falls unexpectedly 
  • During the later stages of the pandemic, the market for face masks was in disequilibrium

1-2-6-excess-supply_edexcel-al-economics

A graph that depicts the condition of excess supply in the market for Covid-19 face masks during the later stages of the pandemic

Diagram Analysis

  • At a price of P1, the quantity supplied of face masks (Qs) is greater than the quantity demanded (Qd)
  • There is a surplus in the market (excess supply) equivalent to QdQs

Market Response

  • This market is in disequilibrium
    • Sellers are frustrated that the masks are not selling and that the price is obviously too high
    • Some buyers are frustrated as they want to purchase the masks but are not willing to pay the high price
  • Sellers will gradually lower prices in order to generate more revenue
    • This causes a contraction in QS as some sellers no longer desire to supply masks
    • This causes an extension in QD as buyers are more willing to purchase masks at lower prices
  • In time, the market will have cleared the excess supply and arrive at a position of equilibrium, PeQe

Examiner Tip

Memorise the rule that shortages arise when the price is below equilibrium whereas surpluses arise when the price is above the  equilibrium.

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Steve Vorster

Author: Steve Vorster

Expertise: Economics & Business Subject Lead

Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.