Disequilibrium in the Market: Definition, Reasons, and Example

Disequilibrium in the Market: Definition, Reasons, and Example

Disequilibrium in the market refers to a situation where the demand and supply of a particular good or service are not in balance, leading to an imbalance in the market. In other words, there is an excess demand or excess supply of the product, resulting in market inefficiency.

Definition

Disequilibrium occurs when the quantity demanded by consumers does not equal the quantity supplied by producers at a given price. This creates a shortage or surplus in the market, leading to price adjustments and changes in market dynamics.

There are two types of disequilibrium: excess demand and excess supply. Excess demand occurs when the quantity demanded exceeds the quantity supplied at a given price. This leads to a shortage in the market, as consumers are willing to pay more for the product than what producers are willing to supply. On the other hand, excess supply occurs when the quantity supplied exceeds the quantity demanded at a given price. This leads to a surplus in the market, as producers are unable to sell all of their products at the current price.

Reasons for Disequilibrium

There are several reasons why disequilibrium may occur in the market. One of the main reasons is shifts in demand and supply. Changes in consumer preferences, income levels, population, and government policies can all lead to shifts in demand and supply curves, causing a mismatch between the two.

Another reason for disequilibrium is price controls. When the government sets price ceilings or price floors, it can disrupt the natural market equilibrium. Price ceilings, which set a maximum price for a product, can lead to excess demand and shortages. Price floors, which set a minimum price for a product, can lead to excess supply and surpluses.

Additionally, external shocks such as natural disasters, wars, or pandemics can also disrupt the market equilibrium. These events can cause sudden changes in demand or supply, leading to disequilibrium.

Example of Disequilibrium

Let’s consider the market for housing. Suppose there is a sudden increase in population in a city, leading to a higher demand for housing. However, due to strict zoning laws and limited construction permits, the supply of housing cannot keep up with the increased demand. This creates excess demand in the market, resulting in a shortage of available housing units. As a result, the prices of houses increase, making it difficult for some individuals to afford housing.

On the other hand, let’s consider a situation where there is a decrease in consumer income due to a recession. As a result, the demand for luxury goods decreases. However, producers continue to produce the same quantity of luxury goods, resulting in excess supply. This leads to a surplus in the market, as producers are unable to sell all of their products at the current price. To reduce the surplus, producers may have to lower the prices of their goods or reduce production.

Disequilibrium in the market refers to a situation where the demand and supply of a particular product or service are not in balance. This means that there is either excess demand or excess supply in the market, leading to a state of imbalance.

There are several factors that can contribute to disequilibrium in the market. One of the main reasons is changes in consumer preferences and tastes. When consumers’ preferences shift towards a different product or service, the demand for the original product decreases, leading to excess supply in the market. On the other hand, if there is an increase in demand for a particular product due to changing consumer preferences, there may be excess demand in the market.

Another factor that can cause disequilibrium is changes in technology. Technological advancements can lead to the production of goods and services at a lower cost, resulting in an increase in supply. If the demand does not keep up with the increased supply, there will be excess supply in the market. Conversely, if there is a technological innovation that increases the demand for a particular product, there may be excess demand in the market.

Government policies and regulations can also contribute to disequilibrium in the market. For example, if the government imposes restrictions on the import of a particular product, the supply may be limited, leading to excess demand. Similarly, if the government provides subsidies or incentives for the production of a certain product, there may be excess supply in the market.

It is important to note that disequilibrium in the market is a temporary state. Over time, market forces such as price adjustments and changes in consumer behavior will work to restore equilibrium. For example, if there is excess demand for a product, the price will increase, which will incentivize producers to increase supply and consumers to reduce their demand. This process will continue until the market reaches a state of equilibrium.

Reasons for Disequilibrium in the Market

Disequilibrium in the market occurs when there is a mismatch between the quantity demanded and the quantity supplied at the prevailing market price. There are several reasons why this imbalance may occur:

1. Shifts in Demand

One of the main reasons for disequilibrium in the market is a shift in demand. This can happen when there is a change in consumer preferences, income levels, or population size. For example, if there is an increase in the number of people wanting to buy a particular product, but the supply remains the same, there will be excess demand and a shortage in the market.

2. Shifts in Supply

Another reason for disequilibrium is a shift in supply. This occurs when there is a change in the production capacity or costs of production. For instance, if there is a decrease in the availability of raw materials needed to produce a certain good, the supply will decrease, leading to excess demand and a shortage in the market.

3. Government Interventions

Government interventions, such as price controls or taxes, can also cause disequilibrium in the market. Price controls, such as price ceilings or price floors, can disrupt the natural equilibrium by preventing prices from adjusting to market conditions. Taxes can increase the cost of production, leading to a decrease in supply and an imbalance in the market.

4. External Shocks

External shocks, such as natural disasters or changes in international trade policies, can also disrupt the equilibrium in the market. These unexpected events can affect both demand and supply, leading to imbalances in the market. For example, if a major supplier of a certain product is hit by a natural disaster, the supply will decrease, resulting in excess demand and a shortage in the market.

Example of Disequilibrium in the Market

Disequilibrium in the market occurs when there is a mismatch between the quantity demanded and the quantity supplied at the prevailing market price. This imbalance creates an opportunity for market forces to adjust and restore equilibrium.

Let’s consider an example of disequilibrium in the market for smartphones. Suppose that the market price for smartphones is $500, and at this price, consumers are willing to buy 1 million smartphones. On the other hand, producers are only willing to supply 800,000 smartphones at this price.

Second, the shortage of smartphones may also encourage new firms to enter the market, attracted by the potential for profits. This increase in the number of producers can help alleviate the shortage by increasing the overall supply of smartphones.