Market Disequilibrium

 

Market disequilibrium is any price at which the demand and supply quantities are not equal. Let’s look at specific examples of market disequilibrium’s, and analyse the results of attempting to set prices anywhere other than the equilibrium price.

Excess D n S

As price increases, the quantity demanded decreases or moves upwards and left along the demand curve. At the same time, setting the price higher induces producers to increase production as they expect higher profits at higher prices. Quantity supplied thus moves in the opposite direction, moving upwards along the curve to a quantity 80.

 

What happens to this surplus?

Producers can only sell the extra goods if they lower the price. As they do so, more quantity is demanded, and producers reduce production. This narrows the gap continuously until the surplus is reduced to zero at the market-clearing, equilibrium price.

 

Excess Demand

Let’s take up the opposite case and assume that firms are not aware of the market value of sugar, and they under-price it at Rs. 20. At this price, the quantity demanded is much higher, now 80 kg, while the lower price is not well-received by producers. This gap between relatively higher quantity demanded and lower quantity supplied is called excess demand. When excess demand exists, market forces take over, consumers start to bid for higher price as quantity supplied is limited, with this the supplier realises that he can charge higher price. This prompts supplier to increase the price of sugar, this process continues till extra demand is satisfied at Rs. 40

 

 

 

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