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Home / IB / Economics / SL / Revision Notes / 2. Microeconomics / 2.3 Competitive Market Equilibrium / 2.3.1 Market Equilibrium & Disequilibrium


2.3.1 Market Equilibrium & Disequilibrium


Market Equilibrium

  • In a market system, prices for goods/services are determined by the interaction of demand and supply 
    • A market is any place that brings buyers and sellers together
    • Markets can be physical (e.g. McDonald's) or virtual (e.g. eBay)

  • Buyers and sellers meet to trade at an agreed price
    • Buyers agree the price by purchasing the good/service
    • If they do not agree on the price then they do not purchase the good/service and are exercising their consumer sovereignty

  • Based on this interaction with buyers, sellers will gradually adjust their prices until there is an equilibrium price and quantity that works for both parties
    • At the equilibrium price, sellers will be satisfied with the rate/quantity of sales
    • At the equilibrium price, buyers are satisfied with the utility that the product provides

Equilibrium

  • Equilibrium in a market occurs when demand = supply

  • At this point, the price is called the equilibrium or market-clearing price
    • This is the price at which sellers are clearing (selling) their stock at an acceptable rate

1-2-6-market-equilibrium_edexcel-al-economics

A graph showing a market in equilibrium with a market clearing price at P & quantity at Q

  • Any price above or below P creates disequilibrium in this market
    • Disequilibrium occurs whenever there is excess demand or excess supply in a market

Market Disequilibrium

Disequilibrium: Excess Demand

  • Excess demand occurs when the demand is greater than the supply
    • It can occur when prices are too low or when demand is so high that supply cannot keep up with it

1-2-6-excess-demand_edexcel-al-economics

A graph that depicts the condition of excess demand in the market for electric scooters

Diagram Analysis

  • At a price of P1, the quantity demanded of electric scooters (Qd) is greater than the quantity supplied (Qs)
  • There is a shortage (excess demand) in the market equivalent to QsQd
     

Market Response

  • This market is in disequilibrium
    • Sellers are frustrated that products are selling so quickly at a price that is obviously too low
    • Some buyers are frustrated as they will not be able to purchase the product
  • Sellers realise they can increase prices and generate more revenue and profits
  • Sellers gradually raise prices
    • This causes a contraction in QD as some buyers no longer desire the good/service at a higher price
    • This causes an extension in QS as other sellers are more incentivised to supply at higher prices
  • In time, the market will have cleared the excess demand and arrive at a position of equilibrium, PeQe
    • Different markets take different lengths of time to resolve disequilibrium
    • E.g. Retail clothing can do so in a few days. Whereas the housing market may take several months, or even years

Disequilibrium: Excess Supply

  • Excess supply occurs when the supply is greater than the demand
    • It can occur when prices are too high or when demand falls unexpectedly 
  • During the later stages of the pandemic, the market for face masks was in disequilibrium

1-2-6-excess-supply_edexcel-al-economics

A graph that depicts the condition of excess supply in the market for Covid-19 face masks during the later stages of the pandemic

Diagram Analysis

  • At a price of P1, the quantity supplied of face masks (Qs) is greater than the quantity demanded (Qd)
  • There is a surplus in the market (excess supply) equivalent to QdQs

Market Response

  • This market is in disequilibrium
    • Sellers are frustrated that the masks are not selling and that the price is obviously too high
    • Some buyers are frustrated as they want to purchase the masks but are not willing to pay the high price
  • Sellers will gradually lower prices in order to generate more revenue
    • This causes a contraction in QS as some sellers no longer desire to supply masks
    • This causes an extension in QD as buyers are more willing to purchase masks at lower prices
  • In time, the market will have cleared the excess supply and arrive at a position of equilibrium, PeQe

Exam Tip

Memorise the rule that shortages arise when the price is below equilibrium whereas surpluses arise when the price is above the  equilibrium.



  • 1. Introduction To Economics
    • 1.1 What Is Economics?
      • 1.1.1 Economics as a Social Science
        • 1.1.2 The Problem of Choice
          • 1.1.3 The Production Possibilities Curve Model (PPC)
            • 1.1.4 Modelling the Economy
            • 1.2 How Do Economists Approach The World?
              • 1.2.1 Economic Methodology
                • 1.2.2 Economic Thought
              • 2. Microeconomics
                • 2.1 Demand
                  • 2.1.1 Demand, Price & Quantity
                    • 2.1.2 Non-Price Determinants of Demand
                    • 2.2 Supply
                      • 2.2.1 Supply, Price & Quantity
                        • 2.2.2 Non-Price Determinants of Supply
                        • 2.3 Competitive Market Equilibrium
                          • 2.3.1 Market Equilibrium & Disequilibrium
                            • 2.3.2 Functions of the Price Mechanism
                              • 2.3.3 Consumer & Producer Surplus
                              • 2.4 Price Elasticity of Demand (PED)
                                • 2.4.1 Definition, Calculation & Determinants of PED
                                  • 2.4.2 The Significance of PED
                                  • 2.5 Income Elasticity of Demand (YED)
                                    • 2.5.1 Definition, Calculation & Illustration of YED
                                    • 2.6 Price Elasticity of Supply (PES)
                                      • 2.6.1 Definition, Calculation & Determinants of PES
                                      • 2.7 Role of Government In Microeconomics
                                        • 2.7.1 Reasons For Government Intervention In Markets
                                          • 2.7.2 Government Intervention: Indirect Taxes & Subsidies
                                            • 2.7.3 Government Intervention: Price Controls, Direct Provision & Regulation
                                            • 2.8 Market Failure: Externalities & Common Pool (Access) Resources
                                              • 2.8.1 Market Failure
                                                • 2.8.2 Negative Externalities
                                                  • 2.8.3 Positive Externalities
                                                    • 2.8.4 Common Pool (Access) Resources
                                                      • 2.8.5 Government Intervention to Address the Market Failure
                                                        • 2.8.6 Other Interventions to Address the Market Failure
                                                        • 2.9 Market Failure: Public Goods
                                                          • 2.9.1 Public Goods
                                                        • 3. Macroeconomics
                                                          • 3.1 Measuring Economic Activity
                                                            • 3.1.1 National Income & The Circular Flow of Income
                                                              • 3.1.2 National Income Terminology & Calculations
                                                                • 3.1.3 The Business Cycle
                                                                  • 3.1.4 Appropriateness of Using GDP/GNI to Measure Well-being
                                                                    • 3.1.5 Alternative Measures of Well-Being
                                                                    • 3.2 Variations in Economic Activity (AD & AS)
                                                                      • 3.2.1 Aggregate Demand (AD)
                                                                        • 3.2.2 Short-Run Aggregate Supply (SRAS)
                                                                          • 3.2.3 Alternative Views of Aggregate Supply (AS)
                                                                            • 3.2.4 Shifts of the Long-Run Aggregate Supply (LRAS)
                                                                              • 3.2.5 Macroeconomic Equilibrium
                                                                              • 3.3 Macroeconomic Objectives
                                                                                • 3.3.1 An Introduction to Macroeconomic Objectives
                                                                                  • 3.3.2 Economic Growth
                                                                                    • 3.3.3 Low Unemployment
                                                                                      • 3.3.4 Low & Stable Rate of Inflation
                                                                                        • 3.3.5 Potential Conflicts Between Macroeconomic Objectives
                                                                                        • 3.4 Inequality & Poverty
                                                                                          • 3.4.1 Measuring Inequality & Poverty
                                                                                            • 3.4.2 Causes of Inequality & Poverty
                                                                                              • 3.4.3 Using Taxation to Reduce Inequality & Poverty
                                                                                                • 3.4.4 Other Policies to Reduce Inequality & Poverty
                                                                                                • 3.5 Demand Management: Monetary Policy
                                                                                                  • 3.5.1 An Overview of Monetary Policy
                                                                                                  • 3.6 Demand Management: Fiscal Policy
                                                                                                    • 3.6.1 An Overview of Fiscal Policy
                                                                                                    • 3.7 Supply-Side Policies
                                                                                                      • 3.7.1 An Overview of Supply-Side Policies
                                                                                                        • 3.7.2 The Effectiveness of Supply-Side Policies
                                                                                                      • 4. The Global Economy
                                                                                                        • 4.1 Benefits of International Trade
                                                                                                          • 4.1.1 The Advantages of Free Trade
                                                                                                          • 4.2 Types of Trade Protection
                                                                                                            • 4.2.1 Tariffs
                                                                                                              • 4.2.2 Quotas
                                                                                                                • 4.2.3 Export Subsidies
                                                                                                                  • 4.2.4 Administrative Barriers
                                                                                                                  • 4.3 Arguments For & Against Trade Protection
                                                                                                                    • 4.3.1 Arguments For & Against Trade Protection
                                                                                                                    • 4.4 Economic Integration
                                                                                                                      • 4.4.1 Understanding Economic Integration
                                                                                                                        • 4.4.2 Types of Trading Blocs
                                                                                                                          • 4.4.3 The World Trade Organisation (WTO)
                                                                                                                          • 4.5 Exchange Rates
                                                                                                                            • 4.5.1 Types of Exchange Rate Systems
                                                                                                                              • 4.5.2 Causes & Consequences of Exchange Rate Fluctuations
                                                                                                                              • 4.6 Balance of Payments
                                                                                                                                • 4.6.1 Components of the Balance of Payments
                                                                                                                                • 4.7 Sustainable Development
                                                                                                                                  • 4.7.1 The Sustainable Development Goals
                                                                                                                                  • 4.8 Measuring Economic Development
                                                                                                                                    • 4.8.1 Single Indicators of Development
                                                                                                                                      • 4.8.2 Composite Indicators of Development
                                                                                                                                        • 4.8.3 Evaluating the Different Approaches
                                                                                                                                        • 4.9 Barriers to Economic Growth & Development
                                                                                                                                          • 4.9.1 Poverty Traps
                                                                                                                                            • 4.9.2 Economic, Political & Social Barriers
                                                                                                                                            • 4.10 Economic Growth & Development Strategies
                                                                                                                                              • 4.10.1 Trade Strategies, Diversification & Social Enterprise
                                                                                                                                                • 4.10.2 Market-Based & Interventionist Policies
                                                                                                                                                  • 4.10.3 Merit Goods & Inward Foreign Direct Investment
                                                                                                                                                    • 4.10.4 Foreign Aid & Development Assistance
                                                                                                                                                      • 4.10.5 Institutional Change
                                                                                                                                                        • 4.10.6 Evaluating Market Orientated Approaches Versus Government Intervention
                                                                                                                                                          • 4.10.7 Progress Towards Sustainable Development Goals

                                                                                                                                                        Author: Steve



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