Definition of market disequilibrium

Published by Patrick Mutisya · 14 days ago

IGCSE Economics – Price Determination: Market Disequilibrium

Allocation of Resources – Price Determination

Objective: Definition of Market Disequilibrium

In a competitive market the price and quantity of a good are determined by the interaction of aggregate demand and aggregate supply. When the quantity demanded does not equal the quantity supplied at the prevailing price, the market is said to be in disequilibrium.

Key Definitions

  • Market Equilibrium: The condition where the quantity demanded (\$Qd\$) equals the quantity supplied (\$Qs\$) at a particular price (\$P_e\$).

    \$Qd = Qs \quad \text{at} \quad P = P_e\$

  • Market Disequilibrium: Any situation in which \$Qd \neq Qs\$ at the current market price, leading to either a surplus or a shortage.

  • Surplus (Excess Supply): Occurs when \$Qs > Qd\$ at the prevailing price. Producers have more output than consumers are willing to buy.

  • Shortage (Excess Demand): Occurs when \$Qd > Qs\$ at the prevailing price. Consumers want to buy more than producers are willing to supply.

Causes of Disequilibrium

  1. Changes in consumer preferences or income (shifts in demand).

  2. Technological advances or changes in input prices (shifts in supply).

  3. Government interventions such as price controls (ceilings or floors).

  4. External shocks (e.g., natural disasters, sudden changes in world prices).

Consequences of Disequilibrium

Type of DisequilibriumMarket ConditionTypical Price MovementResulting Adjustment
Surplus\$Qs > Qd\$Pressure for price to fallLower price increases demand and reduces supply until \$Qd = Qs\$.
Shortage\$Qd > Qs\$Pressure for price to riseHigher price reduces demand and encourages more supply until \$Qd = Qs\$.

Illustrative Diagram (Suggested)

Suggested diagram: Demand and supply curves showing equilibrium, a surplus (price above \$Pe\$) and a shortage (price below \$Pe\$).

Summary

Market disequilibrium is a temporary state that arises when the market price does not clear the market. The natural tendency of competitive markets is to move toward equilibrium through price adjustments: a surplus pushes the price down, while a shortage pushes it up. Understanding these dynamics is essential for analysing how resources are allocated in an economy.