Equilibrium is defined as the price at which the quantity demanded and the quantity supplied are equal. In the short run, equilibrium does not always occur. What terms describe disequilibrium? How is subsequent equilibrium re-established
Disequilibrium refers to a situation where there is a temporary imbalance between quantity demanded and quantity supplied in a market, leading to shortages or surpluses. There are two terms that describe this state:
1. Shortage: A shortage occurs when the quantity demanded of a good or service exceeds the quantity supplied at the prevailing price. In other words, there is excess demand, and consumers are unable to purchase as much as they desire. This often leads to an increase in price and a decrease in quantity demanded until a new equilibrium is reached.
2. Surplus: A surplus, on the other hand, occurs when the quantity supplied of a good or service exceeds the quantity demanded at the prevailing price. In this case, there is excess supply, and producers are left with unsold goods. Surpluses typically lead to price reductions and an increase in quantity demanded until a new equilibrium is established.
To re-establish equilibrium, the following adjustments can take place:
1. Price Mechanism: In a free market, prices are flexible and can adjust based on changes in demand and supply. When there is a shortage, prices tend to increase, which reduces quantity demanded and encourages producers to increase supply. Conversely, when there is a surplus, prices typically decrease, stimulating demand and incentivizing producers to decrease supply.
2. Market Forces: As prices adjust, market forces such as consumer preferences, producer decisions, and resource availability come into play. These factors influence the behavior of buyers and sellers, leading to changes in demand and supply. Over time, the market will naturally adjust until a new equilibrium is reached.
3. Intervention: In some cases, government or regulatory intervention may be applied to address disequilibrium. For example, if there is a shortage of essential goods, the government may implement price controls or take steps to encourage increased supply. However, intervention can have unintended consequences and may not always lead to an efficient outcome.
It's important to note that while equilibrium is the ideal state in a market, disequilibrium is a natural occurrence and often serves as a signaling mechanism that prompts market adjustments to clear imbalances and restore equilibrium.