Equilibrium & Disequilibrium (Edexcel IGCSE Economics)

Revision Note

Steve Vorster

Written by: Steve Vorster

Reviewed by: Jenna Quinn

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 that the product provides benefits worth paying for

Equilibrium

  • Equilibrium in a market occurs when demand = supply

  • At this point the price is called the market clearing price

    • This is the price at which sellers are clearing (selling) their stock at an acceptable rate

Diagram: Market Equilibrium

In a market system, prices for goods/services are determined by the interaction of demand & supply  A market is any place that brings buyers & 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 that the product provides benefits worth paying for Equilibrium  Equilibrium in a market occurs when demand = supply  At this point the price is called the 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

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

Diagram: Excess Demand

The condition of excess demand in the market for electric scooters

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 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. For example, 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

Diagram: Excess Supply

The condition of excess supply in the market for Covid-19 face masks during the later stages of the pandemic

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 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 & arrive at a position of equilibrium (PeQe)

Examiner Tips and Tricks

Excess demand arise when the price is below equilibrium, whereas excess supply arises when the price is above equilibrium.

Equilibrium in Demand & Supply Schedules

  • A demand and supply schedule shows the quantity demanded and the quantity supplied of a product at different price levels

  • Demand and supply schedules can be used to identify equilibrium & disequilibrium
     

Demand & Supply Schedule Per Week For YEEZY Boost 700 Wave Runner Trainers

Price ($)

Quantity Demanded (QD)

Quantity Supplied (QS)

Excess Demand/Supply

300

1200

500

Excess demand = 700

400

1000

650

Excess demand = 350

500

800

800

Equilibrium

600

600

950

Excess supply = 350

700

400

1100

Excess supply = 700

  • At a price of $500, the market is in equilibrium

    • The QD = QS (800 units) 

  • At a price of $300 & $400, there is excess demand as the product is more affordable for consumers

    • Producers supply less at lower prices as they make less profit per unit

    • Producers are incentivised to supply more when prices are higher

  • At a price of $600 & $700, there is excess supply as the high price has eliminated some buyers from the market

    • Producers would love to sell at this high price but in order to clear their stock, they have to lower the price and move towards the equilibrium

Worked Example

Quantity Demanded of Motorcycles


Year


Quantity Demanded

2022

1000

2023

1400

2024

1600

Calculate the excess demand for motorcycles in 2022-2024 if the quantity supplied during each year was 500

Step 1: Calculate demand for 2022-2024

Demand = 1000 + 1400 + 1600

= 4000

Step 2: Calculate supply for 2022-2024

Supply = 500 + 500 + 500

= 1500

Step 3: Calculate supply for 2022-2024

Demand - Supply

4000 - 1500 (1)

Excess demand = 2500 motorcycles (1)

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Steve Vorster

Author: Steve Vorster

Expertise: Economics & Business Subject Lead

Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.

Jenna Quinn

Author: Jenna Quinn

Expertise: Head of New Subjects

Jenna studied at Cardiff University before training to become a science teacher at the University of Bath specialising in Biology (although she loves teaching all three sciences at GCSE level!). Teaching is her passion, and with 10 years experience teaching across a wide range of specifications – from GCSE and A Level Biology in the UK to IGCSE and IB Biology internationally – she knows what is required to pass those Biology exams.