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Market Disequilibrium
and Changes in Equilibrium

Understand what happens when markets are out of balance, how surpluses and shortages arise, and how shifts in supply and demand create new equilibrium outcomes.

AP Microeconomics

What is Market Equilibrium?

Market equilibrium occurs at the price where quantity demanded equals quantity supplied. At this point, there is no tendency for the price to change because buyers and sellers are perfectly matched.

Quantity Price
\(D\)
\(S\)
 E
\(P^*\)
\(Q^*\)

What is Disequilibrium?

Disequilibrium occurs when the market price is above or below the equilibrium price. At a non-equilibrium price, quantity demanded and quantity supplied diverge, creating either a surplus or a shortage.

Surplus
When \(P > P^*\), quantity supplied exceeds quantity demanded. Sellers have excess inventory.
Shortage
When \(P < P^*\), quantity demanded exceeds quantity supplied. Buyers cannot find enough goods.

Visualizing a Surplus

Quantity Price
\(D\)
\(S\)
\(P_1\)
\(Q_D\)
\(Q_S\)
 Surplus

Visualizing a Shortage

Quantity Price
\(D\)
\(S\)
\(P_2\)
\(Q_S\)
\(Q_D\)
 Shortage

What Shifts Demand?

A change in any non-price determinant shifts the entire demand curve. Remember the mnemonic TRIBE:

Tastes
Consumer preferences change due to trends, advertising, or cultural shifts.
Related Goods
Prices of substitutes or complements change, affecting demand for this good.
Income
Consumer income rises or falls, shifting demand for normal and inferior goods.
Buyers
The number of consumers in the market increases or decreases.
Expectations
Consumers expect future prices or income to change, altering current demand.

What Shifts Supply?

A change in any non-price determinant shifts the entire supply curve. Use the mnemonic ROTTEN:

Resources
Input prices (wages, raw materials) change production costs.
Other Goods
Profitability of producing alternative goods changes.
Technology
Innovation lowers costs, increasing supply.
Taxes/Subsidies
Government policies raise or lower production costs.
Expectations
Producers' future price expectations affect current output.
Number of Sellers
Entry or exit of firms in the market changes total supply.

Shift vs. Movement Along

Shift of Curve Movement Along Curve
Caused by Non-price determinants Change in the good's own price
What moves The entire curve shifts left or right A single point slides along the same curve
Effect New equilibrium \(P^*\) and \(Q^*\) \(Q_D\) or \(Q_S\) changes, not equilibrium
Example Income rises: demand shifts right Price falls: \(Q_D\) increases

Demand Shift: New Equilibrium

Quantity Price
\(S\)
\(D_1\)
\(E_1\)
\(D_2\)
\(E_2\)

Supply Shift: New Equilibrium

Quantity Price
\(D\)
\(S_1\)
\(E_1\)
\(S_2\)
\(E_2\)

How to Analyze Equilibrium Changes

1
Identify the event. What external change occurred? Is it a demand-side or supply-side factor?
2
Determine the shift. Does the event shift demand or supply? Does the curve shift left (decrease) or right (increase)?
3
Find the new equilibrium. Locate where the shifted curve intersects the stationary curve.
4
State the effect. Describe the change in equilibrium price and equilibrium quantity.

Example: Coffee Market

Scenario: A severe frost destroys a large portion of the coffee bean harvest in Brazil. What happens to the equilibrium price and quantity of coffee?

1
Event: Frost destroys crops: this is a resource/input change affecting supply.
2
Shift: Supply decreases: the supply curve shifts left.
3
New equilibrium: The leftward supply shift intersects demand at a higher price and lower quantity.
4
Result: Equilibrium price rises, equilibrium quantity falls.

Example: Smartphone Market

Scenario: Consumer income rises significantly while new manufacturing technology lowers production costs. Both demand and supply shift right. What happens?

Quantity Price
\(D_1\)
\(D_2\)
\(S_1\)
\(S_2\)
\(E_1\)
\(E_2\)

Double Shifts: What's Ambiguous?

Scenario Price Quantity
\(D\) up, \(S\) up Ambiguous Increases
\(D\) up, \(S\) down Increases Ambiguous
\(D\) down, \(S\) up Decreases Ambiguous
\(D\) down, \(S\) down Ambiguous Decreases

Common Mistakes to Avoid

✕ Confusing Shift vs. Movement
A change in the good's own price causes movement along the curve, not a shift. Only non-price factors shift the curve.
✕ Shifting the Wrong Curve
Income changes affect demand. Input cost changes affect supply. Always identify the correct curve first.
✕ Double-Shift Certainty
When both curves shift, one variable is always ambiguous. Never state both price and quantity effects as certain without knowing magnitudes.

Question 1 of 5

If the market price is set above the equilibrium price, which of the following will occur?

Question 2 of 5

A new study shows that eating avocados significantly improves heart health. What happens in the avocado market?

Question 3 of 5

The government imposes a new tax on steel production. In the market for cars (which use steel), what is the most likely effect?

Question 4 of 5

If both demand and supply for a good increase simultaneously, which outcome is certain?

Question 5 of 5

A market currently has a shortage. Which of the following will naturally occur in a competitive market?