Equilibrium & Disequilibrium | Economics for GCSE/IGCSE - Year 11 PDF Download

Market Equilibrium

• In a market economy, prices for goods and services are determined through the interplay of demand and supply.
  • A market serves as a platform where buyers and sellers converge to engage in transactions.
  • Markets can manifest physically, such as in traditional stores like McDonald's, or virtually, as seen in online platforms like eBay.
• Buyers and sellers reach a consensus on prices through mutual agreement.
• If a mutual price agreement is not reached, buyers retain the right to abstain from purchasing the good or service, thereby exercising their consumer autonomy.
• Following interactions with buyers, sellers gradually adapt their prices until an equilibrium point is reached, satisfying both parties.
  • At the equilibrium price, sellers find the rate and quantity of sales acceptable.
  • Similarly, at the equilibrium price, buyers are content that the product's benefits justify the cost.

Equilibrium

• Equilibrium in a market happens when the quantity demanded equals the quantity supplied.
• At this juncture, the price is termed as the market clearing price.
  • It denotes the price at which sellers are effectively moving their inventory at an acceptable pace.

• Any price either higher or lower than P leads to a state of disequilibrium within this market.
  • Disequilibrium arises whenever there is either an excess demand or an excess supply in the market.

Market Disequilibrium

• Disequilibrium arises in a market when there is either excess demand or excess supply.
  • Excess demand occurs when the quantity demanded surpasses the quantity supplied. This can happen when prices are too low or when demand outstrips supply capacity.

Diagram Analysis:

• For instance, at price P₁, the quantity demanded (Q_d) of electric scooters exceeds the quantity supplied (Q_s), resulting in a shortage equivalent to Q_s Q_d in the market.
• This shortage indicates that demand for electric scooters at that price level outstrips the available supply, leading to an imbalance in the market.

Market response

• Market Disequilibrium:
  • Sellers are frustrated because their products are selling too quickly at prices that are evidently too low.
  • Some buyers are also frustrated as they are unable to purchase the products.
• Understanding Disequilibrium:
  • Sellers are unhappy when products sell rapidly at very low prices.
  • Buyers face frustration when they cannot buy desired products.
• Impact of Low Prices:
  • Sellers recognize the opportunity to raise prices, leading to increased revenue and profits.
  • This gradual price increase affects demand (Q_D) and supply (Q_S).
• Supply and Demand Effects:
  • Price increments reduce Q_D as some buyers lose interest due to higher prices.
  • Simultaneously, Q_S expands as more sellers are motivated to provide goods at elevated prices.
• Market Equilibrium:
  • Over time, excess demand diminishes, and the market reaches equilibrium (P_e Q_e).
  • Different markets vary in the time taken to resolve disequilibrium; for instance, retail clothing markets may stabilize in days, while housing markets might require months or even years.

Disequilibrium - Excess Supply

• Excess supply arises when the quantity supplied surpasses the quantity demanded.
  • This situation can occur due to either excessively high prices or unexpected declines in demand.
• In the later phases of the pandemic, the face mask market experienced disequilibrium.

Diagram Analysis:

• When the price of face masks is at P₁, the quantity supplied (Q_s) exceeds the quantity demanded (Q_d), resulting in a surplus equivalent to Q_d - Q_s.

Market Response

Market Disequilibrium: In this situation, sellers find the masks overpriced and unsold while some buyers are interested but deterred by the high price, leading to frustration on both ends.

• Seller Frustration: Sellers are troubled by the lack of sales due to high prices.
• Buyer Frustration: Some buyers wish to buy masks but find the prices unaffordable, causing discontent.
• Price Adjustment Process: Sellers gradually decrease prices to boost sales, causing a reduction in quantity supplied (Q_S) as some sellers withdraw from supplying masks. Simultaneously, buyers become more willing to purchase at lower prices, expanding the quantity demanded (Q_D).
• Market Equilibrium: Eventually, through this adjustment process, the market reaches a state of equilibrium (P_e, Q_e) where supply and demand are balanced, resolving the surplus.

Equilibrium in Demand & Supply Schedules

• A demand and supply schedule illustrates the quantity demanded and supplied of a product at various price levels. These schedules help in pinpointing equilibrium and disequilibrium situations.

• For instance, at a price of $500, the market reaches equilibrium where the quantity demanded equals the quantity supplied, standing at 800 units.
• However, when prices drop to $300 and $400, there is excess demand since the product becomes more affordable to consumers. Consequently, producers tend to supply fewer units at lower prices due to reduced profits per unit. Conversely, producers are enticed to supply more when prices rise.
• Conversely, higher prices like $600 and $700 lead to excess supply as some buyers are deterred by the steep prices. While producers desire to sell at these lucrative prices, they often need to lower prices to clear their stock and move towards equilibrium.