LESS0N 13

EQUILIBRIUM PRICE

When the buyers and sellers transact in a market they agree on the price of the commodity and the
amount to be sold and bought. This agreed price is called the equilibrium price.
Equilibrium price is the price where the demand for a product or a service is equal to the supply of the
product or service (D=S). At equilibrium, both consumers and producers are satisfied, thereby keeping the
price of the product or the service stable.

MARKET EQUILIBRIUM

In our demand and supply analysis, this market agreement is shown by the intersection of the demand
curve with the supply curve.
From a graphical perspective, the equilibrium price implies that buyers and sellers are in agreement to buy
and sell the same amount of commodity at the equilibrium price.
In an equilibrium market, there are neither surpluses nor shortages for a good or service

DISEQUILIBRIUM PRICE

There are cases when there are disagreements among buyers and sellers on the price and quantity. The
quantity demanded is not equal to the quantity supplied (D ≠ S). In such cases disequilibrium situations can
occur.
A price that does not achieve equilibrium in the market. A disequilibrium price is either above or below the
equilibrium price. A price below the equilibrium price creates a shortage and a price above the equilibrium
price creates a surplus. In both case, the market imbalance prompts the price to change, moving toward
the equilibrium price.

EXAMPLE OF DISEQUILIBRIUM SITUATIONS

1. When the amount of buyers are willing to buy is not the same as the amount the producers are willing
to sell at a given price.
2. When at a given level of quantity, the price that buyers are willing to purchase the commodity is
different from the price producers are willing to sell.

Excess of Demand / Shortage

It is a situation when Market Price is lower than the Equilibrium Price (Demand >Supply)
So what is the remedy for this situation?
Market Price is pushed up, which leads to two consequences:
Supply increases as producers are willing to supply more at a higher price
Demand decreases as buyers will buy less at a higher price.
This tendency of increase in supply and decrease in demand will continue until equilibrium is established
(D=S).

Excess of Supply/ Surplus

It is a situation when Market Price is higher than the Equilibrium Price (Demand <Supply)
Sellers will not be able to sell what they want to sell.
What is the remedy?
Market Price is pushed down, which leads to two consequences:
Supply decreases as producers are willing to supply less at a lower price.
Demand increases as buyers will buy more at a lower price.