At equilibrium, quantity demanded equals quantity supplied; at any other price there is a shortage or a surplus.
Market equilibrium is the price at which quantity demanded equals quantity supplied. The market clears: there is no shortage and no surplus. On a diagram, it is where the demand and supply curves cross.
Market disequilibrium is any price where quantity demanded and quantity supplied are not equal.
If price is below equilibrium, quantity demanded is greater than quantity supplied. This is a shortage, or excess demand. Buyers compete for the limited goods, so sellers can raise prices. Price rises towards equilibrium.
If price is above equilibrium, quantity supplied is greater than quantity demanded. This is a surplus, or excess supply. Unsold stock builds up, so sellers cut prices. Price falls towards equilibrium.
- Equilibrium
- Price where quantity demanded equals quantity supplied.
- Shortage (excess demand)
- Quantity demanded > quantity supplied; price tends to rise.
- Surplus (excess supply)
- Quantity supplied > quantity demanded; price tends to fall.
| Price ($) | Quantity demanded | Quantity supplied | Outcome |
|---|---|---|---|
| 4 | 400 | 200 | Shortage of 200 |
| 5 | 300 | 300 | Equilibrium |
| 6 | 200 | 400 | Surplus of 200 |
Worked example: Finding equilibrium from a schedule
A market for sandwiches has this demand and supply schedule.
- Find the price where the two quantities match: at $5, quantity demanded and supplied are both 300.
- Equilibrium price is $5 and equilibrium quantity is 300.
- At $4, quantity demanded is 400 but supplied is 200: a shortage of 200.
- At $6, quantity supplied is 400 but demanded is 200: a surplus of 200.
Watch out for this
A shortage means the good has run out.
A shortage means quantity demanded is greater than quantity supplied at the current price. Some goods are still sold; there just are not enough for everyone who wants them at that price.
Check your understanding
At the current price, 500 units are demanded and 300 are supplied. What will happen?
- There is a shortage of 200, so the price will tend to rise.
- There is a surplus of 200, so the price will tend to fall.
- The market is in equilibrium.