Economics – The allocation of resources - Price determination | e-Consult

Market Disequilibrium occurs when the quantity demanded of a good or service is not equal to the quantity supplied at the equilibrium price. This creates pressure on the price to adjust.

There are two main types of market disequilibrium:

• Surplus: This occurs when the quantity supplied exceeds the quantity demanded. At the equilibrium price, producers are willing to supply more than consumers are willing to buy. This leads to unsold goods and downward pressure on prices. Factors causing a surplus include:
  • Decreased consumer income (leading to lower demand)
  • Technological advancements increasing supply
  • Government subsidies leading to increased production
• Shortage: This occurs when the quantity demanded exceeds the quantity supplied. At the equilibrium price, consumers want to buy more than producers are willing to sell. This leads to empty shelves and upward pressure on prices. Factors causing a shortage include:
  • Increased consumer income (leading to higher demand)
  • Disruptions to the supply chain (reducing supply)
  • Bad weather affecting agricultural output

The forces of supply and demand will work to restore equilibrium. A surplus will lead producers to lower prices and reduce output, while a shortage will lead producers to raise prices and increase output.