Drawing and interpretation of disequilibrium using demand and supply curves

🔍 Objective

Learn how to draw and interpret disequilibrium situations using demand and supply curves.

In a simple market, the price is set where the quantity demanded equals the quantity supplied.

Mathematically:

\$D(P) = S(P)\$

Where:

• \$D(P)\$ – Quantity demanded at price \$P\$
• \$S(P)\$ – Quantity supplied at price \$P\$

When the market is not at equilibrium, we have either:

1. Excess Demand (Shortage) – Quantity demanded > Quantity supplied.
2. Excess Supply (Surplus) – Quantity supplied > Quantity demanded.

In both cases, the price will change to move the market back toward equilibrium.

Follow these steps to sketch a disequilibrium:

1. Draw the vertical axis for price (\$P\$) and the horizontal axis for quantity (\$Q\$).
2. Plot the demand curve (downward sloping).
3. Plot the supply curve (upward sloping).
4. Mark the current price (e.g., \$P_c\$).
5. Find the quantity demanded at \$P_c\$ (point on demand curve).
6. Find the quantity supplied at \$P_c\$ (point on supply curve).
7. Shade the area between the two quantities to show the excess.

Example: Market for 🍎 apples at \$P_c = \\$2$.

• If the quantity demanded is higher than the quantity supplied, there is a shortage. Buyers compete, driving the price up.

• If the quantity supplied is higher than the quantity demanded, there is a surplus. Sellers lower prices to clear the excess stock.

Use the shaded area to explain how the market will adjust.

Suppose the demand and supply functions are:

\$D(P) = 100 - 10P\$

\$S(P) = 20 + 5P\$

At the current price \$P_c = \\$4$:

• Quantity demanded: \$D(4) = 100 - 10(4) = 60\$
• Quantity supplied: \$S(4) = 20 + 5(4) = 40\$

Since \$60 > 40\$, there is a shortage of 20 apples. Buyers will bid up the price until the market reaches equilibrium at \$P^* = \\$8\$ where \$D(8) = S(8) = 20$.

• When drawing a diagram, label all axes, curves, and key points clearly.
• Use the correct notation: \$P\$ for price, \$Q\$ for quantity.
• Explain the direction of price change in response to excess demand or supply.
• Show the shaded area to illustrate the magnitude of the disequilibrium.
• Remember to state the economic intuition behind the adjustment process.