Market Equilibrium
& Disequilibrium
Understand where supply meets demand, what happens when markets are out of balance, and how shifts in curves change equilibrium price and quantity.
AP Macroeconomics
What Is a Market?
A market is any arrangement that brings buyers and sellers together to exchange goods, services, or resources. Markets can be physical (a farmers' market) or virtual (an online exchange).
Demand Side
Buyers who are willing and able to purchase a good at various prices.
Supply Side
Sellers who are willing and able to produce and sell a good at various prices.
The Demand and Supply Curves
Defining Market Equilibrium
Market equilibrium occurs at the price where the quantity demanded equals the quantity supplied. At this point, there is no tendency for the price to change.
\( P_e \)
The equilibrium price: the price at which the market clears.
\( Q_e \)
The equilibrium quantity: the amount bought and sold at \( P_e \).
Disequilibrium: Surplus
Disequilibrium: Shortage
Surplus vs Shortage
| Surplus | Shortage | |
|---|---|---|
| Price relative to \( P_e \) | \( P > P_e \) | \( P < P_e \) |
| Condition | \( Q_s > Q_d \) | \( Q_d > Q_s \) |
| Also called | Excess supply | Excess demand |
| Market pressure on price | Price falls | Price rises |
| Result | Returns to \( P_e \) | Returns to \( P_e \) |
Shifts in Demand
Shifts in Supply
Determinants of Demand and Supply
Demand Shifters
Tastes and preferences
Income (normal vs inferior)
Number of buyers
Expectations of future prices
Prices of related goods
Income (normal vs inferior)
Number of buyers
Expectations of future prices
Prices of related goods
Supply Shifters
Technology
Input costs (resources)
Number of sellers
Expectations of future prices
Subsidies and taxes
Regulations
Input costs (resources)
Number of sellers
Expectations of future prices
Subsidies and taxes
Regulations
How to Find Equilibrium
1
Write down the demand equation \( Q_d = a - bP \) and the supply equation \( Q_s = c + dP \).
2
Set \( Q_d = Q_s \) because at equilibrium, quantity demanded equals quantity supplied.
3
Solve for \( P_e \): rearrange to isolate the price variable.
4
Substitute \( P_e \) back into either equation to find \( Q_e \).
5
Verify: check that \( Q_d(P_e) = Q_s(P_e) \) and both are positive.
Example 1: Finding Equilibrium
1
Set \( Q_d = Q_s \): \( 100 - 2P = 20 + 3P \)
2
Combine: \( 80 = 5P \), so \( P_e = 16 \)
3
Substitute: \( Q_e = 100 - 2(16) = 68 \)
4
Verify: \( Q_s = 20 + 3(16) = 68 \) ✓
Example 2: Identifying Disequilibrium
1
\( Q_d = 100 - 2(20) = 60 \)
2
\( Q_s = 20 + 3(20) = 80 \)
3
Since \( Q_s = 80 > Q_d = 60 \), there is a surplus of 20 units.
4
Price \( 20 > P_e = 16 \): price is above equilibrium, confirming excess supply.
Example 3: A Demand Shift
1
Set \( 130 - 2P = 20 + 3P \)
2
\( 110 = 5P \), so \( P_e' = 22 \)
3
\( Q_e' = 130 - 2(22) = 86 \)
Common Mistakes
✕ Movement vs Shift
A change in the good's own price causes a movement along the curve, not a shift. Only non-price determinants shift the entire curve.
✕ Surplus Direction
A surplus means price is too high, not too low. When \( Q_s > Q_d \), prices must fall, not rise.
✕ Confusing S and D Shifts
An increase in demand raises both \( P \) and \( Q \). An increase in supply raises \( Q \) but lowers \( P \). Don't mix them up.
Summary: Shift Effects on Equilibrium
| Shift | \( P_e \) | \( Q_e \) |
|---|---|---|
| Demand increases (right) | Rises | Rises |
| Demand decreases (left) | Falls | Falls |
| Supply increases (right) | Falls | Rises |
| Supply decreases (left) | Rises | Falls |
| Both increase | Indeterminate | Rises |
| Both decrease | Indeterminate | Falls |
Question 1 of 5
At a price above the equilibrium price, which of the following will occur?
When price is above equilibrium, \( Q_s > Q_d \), creating a surplus. Sellers have excess inventory and will lower prices to sell it.
Question 2 of 5
If \( Q_d = 50 - P \) and \( Q_s = 10 + P \), what is the equilibrium price?
Set \( Q_d = Q_s \): \( 50 - P = 10 + P \), so \( 40 = 2P \), giving \( P_e = 20 \). Substituting back: \( Q_e = 30 \).
Question 3 of 5
A technological improvement in coffee production would cause:
Technology is a supply determinant. An improvement shifts supply rightward: more coffee produced at every price. This lowers \( P_e \) and raises \( Q_e \).
Question 4 of 5
Using \( Q_d = 100 - 2P \) and \( Q_s = 20 + 3P \), at \( P = 10 \), the market experiences:
\( Q_d = 100 - 20 = 80 \) and \( Q_s = 20 + 30 = 50 \). Since \( Q_d = 80 > Q_s = 50 \), there is a shortage of 30 units. The price \( 10 < P_e = 16 \), confirming excess demand.
Question 5 of 5
If both demand and supply increase simultaneously, what can we say with certainty?
When both demand and supply increase, both shifts push \( Q_e \) higher, so quantity definitely rises. However, rising demand pushes price up while rising supply pushes price down: the net effect on \( P_e \) is indeterminate without knowing the magnitudes.