Market Disequilibrium and Changes in Equilibrium: Study Guide (Microeconomics 2.7)

From a resting point to a moving one

In Topic 2.6 you found the equilibrium: the price at which the quantity buyers want to buy equals the quantity sellers want to sell. This topic asks two questions:

1. What happens when the price is not at equilibrium?
2. What happens when something changes demand or supply, so that the equilibrium itself moves?

Throughout this guide we use the fish market in Port Ellery, a fictional harbour town. Each day, local boats sell mackerel to restaurants and shops, by the crate. The daily market is:

• Demand: Qd = 200 − 5P
• Supply: Qs = 10P − 100

where P is the price in dollars per crate and Q is crates per day.

Price ($ per crate)	10	15	20	25	30
Quantity demanded	150	125	100	75	50
Quantity supplied	0	50	100	150	200

At $20, both quantities are 100 crates. So the equilibrium price is $20 and the equilibrium quantity is 100 crates per day. Setting 200 − 5P = 10P − 100 gives 15P = 300, so P = 20, which confirms the table.

At equilibrium, consumer surplus is ½ × 100 × (40 − 20) = $1,000 per day. Producer surplus is ½ × 100 × (20 − 10) = $500. Total surplus is $1,500. (The demand curve meets the price axis at $40 and the supply curve at $10.)

Shortages and surpluses

When the price is not at equilibrium, the two quantities differ.

• A shortage (excess demand) exists when quantity demanded is greater than quantity supplied. This happens at any price below equilibrium. Size of shortage = Qd − Qs.
• A surplus (excess supply) exists when quantity supplied is greater than quantity demanded. This happens at any price above equilibrium. Size of surplus = Qs − Qd.

In Port Ellery:

• At $30, sellers bring 200 crates but buyers want only 50. There is a surplus of 150 crates.
• At $15, buyers want 125 crates but sellers bring only 50. There is a shortage of 75 crates.

Notice the size of a shortage or surplus is a horizontal distance on the graph. It is measured in units of the good, not in dollars.

How market forces restore equilibrium

A competitive market corrects itself because the shortage or surplus changes what buyers and sellers do.

Surplus (price too high). At $30, boats return with unsold fish. Sellers who want to sell their catch cut their prices. As the price falls, two things happen at once: quantity demanded rises (a movement down along the demand curve) and quantity supplied falls (a movement down along the supply curve). The surplus shrinks until it disappears at $20.

Shortage (price too low). At $15, restaurants find there is not enough fish. Some offer more than $15 to make sure they get a crate. As the price rises, quantity supplied rises and quantity demanded falls. The shortage shrinks until it disappears at $20.

Neither curve shifts during this adjustment. Only the price changes, and both quantities move along their curves. This is why an equilibrium is stable: any move away from it creates pressure to move back.

Surplus lost while the market is out of equilibrium

At a disequilibrium price, the quantity actually traded is the smaller of Qd and Qs. Buyers cannot be made to buy more than they want, and sellers cannot be made to sell more than they want.

At $30 only 50 crates are traded. Assume the buyers who value fish most get it.

• Consumer surplus = ½ × 50 × (40 − 30) = $250.
• Producer surplus = area between $30 and the supply curve up to 50 crates. The supply curve gives $15 at 50 crates, so PS = 50 × (30 − 15) + ½ × 50 × (15 − 10) = 750 + 125 = $875.
• Total surplus = $1,125, which is $1,500 − $1,125 = $375 less than at equilibrium.

The $375 is lost because 50 crates that buyers valued more than they cost to catch are not traded. You can check it directly: ½ × (100 − 50) × (30 − 15) = $375. You will call this kind of loss deadweight loss in Topic 2.8.

Notice that sellers who do sell at $30 gain: PS rises from $500 to $875. Buyers lose more than sellers gain, so the market as a whole is worse off.

Changes in equilibrium: four single shifts

When a determinant of demand or supply changes (Topics 2.1 and 2.2), a curve shifts. At the old price there is now a shortage or surplus, and the market adjusts to a new equilibrium.

Event	Shift	At the old price	Equilibrium price	Equilibrium quantity
Demand increases	D right	shortage	rises	rises
Demand decreases	D left	surplus	falls	falls
Supply increases	S right	surplus	falls	rises
Supply decreases	S left	shortage	rises	falls

A memory aid: a demand shift moves price and quantity in the same direction. A supply shift moves them in opposite directions.

Always state the full chain: event → which curve shifts and which way → shortage or surplus at the old price → price changes → movement along the other curve → new equilibrium.

Worked example 1: a surplus at the start of the day

Question. One morning, Port Ellery’s fish sellers open with a price of $25 per crate. (a) Is there a shortage or a surplus, and how large is it? (b) Describe what happens to price, quantity demanded and quantity supplied as the market adjusts. (c) How many crates are traded at $25, and how much consumer surplus do buyers get?

(a) At $25:

1. Quantity demanded = 200 − 5 × 25 = 75 crates.
2. Quantity supplied = 10 × 25 − 100 = 150 crates.
3. Qs > Qd, so there is a surplus of 150 − 75 = 75 crates.

(b) Sellers with unsold fish cut prices. As the price falls towards $20, quantity demanded rises from 75 to 100 (movement along D), and quantity supplied falls from 150 to 100 (movement along S). The surplus disappears at $20 and 100 crates.

(c) Only 75 crates are traded, the smaller of 75 and 150. Consumer surplus = ½ × 75 × (40 − 25) = $562.50, compared with $1,000 at equilibrium.

Check. The price $25 is above $20, so a surplus is the right answer. A price above equilibrium always gives a surplus; a price below always gives a shortage.

Worked example 2: an increase in demand

Question. A food festival makes grilled mackerel fashionable. At every price, restaurants want 30 more crates per day. The new demand is Qd = 230 − 5P. Supply does not change. (a) Find the new equilibrium price and quantity. (b) Calculate the change in consumer surplus, producer surplus and total surplus. (c) Explain the adjustment in words.

(a) Set 230 − 5P = 10P − 100:

1. 330 = 15P, so P = $22.
2. Q = 10 × 22 − 100 = 120 crates per day.
3. Check with demand: 230 − 5 × 22 = 120. ✓

(b) The new demand curve meets the price axis at 230 ÷ 5 = $46.

	Before (e₁)	After (e₂)	Change
Price	$20	$22	+$2
Quantity	100	120	+20 crates
Consumer surplus	½ × 100 × (40 − 20) = $1,000	½ × 120 × (46 − 22) = $1,440	+$440
Producer surplus	½ × 100 × (20 − 10) = $500	½ × 120 × (22 − 10) = $720	+$220
Total surplus	$1,500	$2,160	+$660

(c) At the old price of $20, buyers now want 130 crates but sellers offer only 100: a shortage of 30 crates. Buyers bid the price up. The higher price gives sellers a reason to catch and sell more, so quantity supplied rises along the unchanged supply curve. The market settles at $22 and 120 crates.

Interpretation. Consumer surplus rises here even though the price rose. That is because buyers now value mackerel more: the whole demand curve is higher. Do not assume a higher price always means lower consumer surplus. Compare areas on the correct curves.

Elasticity decides the size of the change

The direction of each change comes from the table above. The size depends on the price elasticities of demand and supply.

Suppose bad weather cuts the catch, so supply falls by 30 crates at every price: Qs = 10P − 130. Compare Port Ellery’s demand with a flatter demand curve, Qd = 300 − 10P, that passes through the same starting point ($20, 100 crates) but is more elastic there.

Demand curve	Elasticity at $20	New price	New quantity	Price change	Quantity change
Qd = 200 − 5P	1.0	$22	90	+$2.00	−10 crates
Qd = 300 − 10P	2.0	$21.50	85	+$1.50	−15 crates

When demand is more elastic, buyers respond strongly to a higher price. A supply decrease then causes a smaller price rise and a larger fall in quantity. When demand is more inelastic, most of the effect shows up as a higher price.

The same logic works for supply. If supply is very elastic, a demand increase mostly raises quantity. If supply is very inelastic (for example, fish already landed today), a demand increase mostly raises price.

Shift	More elastic other curve	More inelastic other curve
Demand shift	bigger change in Q, smaller change in P (elastic supply)	bigger change in P, smaller change in Q (inelastic supply)
Supply shift	bigger change in Q, smaller change in P (elastic demand)	bigger change in P, smaller change in Q (inelastic demand)

When both curves shift

Sometimes two events happen together. Each shift on its own gives a clear answer, but together one variable is indeterminate: it depends on which shift is larger.

Demand	Supply	Price	Quantity
increases	increases	indeterminate	rises
decreases	decreases	indeterminate	falls
increases	decreases	rises	indeterminate
decreases	increases	falls	indeterminate

Port Ellery shows why. Start at $20 and 100 crates and let demand rise by 30 crates at every price.

• If supply also rises by 30, the new equilibrium is $20 and 130 crates: price unchanged.
• If supply rises by 60, it is $18 and 140 crates: price falls.
• If demand rises by 60 and supply by 30, it is $22 and 150 crates: price rises.

Quantity rose every time, but price went three different ways. On an exam, state what you can predict, name the variable that is indeterminate, and say that it depends on the relative size of the shifts.

Common misconceptions

• “A shortage means the good is scarce.” Scarcity is permanent. A shortage happens only when the price is below equilibrium, and it ends when the price rises.
• “A surplus is good because there is plenty.” A surplus means unsold output at the current price. It pushes the price down, and while it lasts, total surplus is lower than at equilibrium.
• “When price rises, supply increases.” A higher price increases quantity supplied, a movement along the curve. Supply shifts only when a determinant changes.
• “An increase in demand raises the price, which then reduces demand.” The higher price reduces quantity demanded, a movement along the new demand curve. Demand does not shift back.
• “Shortage size is measured in dollars.” It is a quantity: Qd − Qs at the given price.
• “If both curves shift right, price must rise.” Price is indeterminate; only quantity is certain to rise.
• “Higher price always means lower consumer surplus.” Not when demand itself has increased. Compare the areas under the relevant demand curve.
• “At a disequilibrium price, the quantity traded is quantity demanded.” It is the smaller of Qd and Qs.

Where this leads

Next, Topic 2.8, The Effects of Government Intervention in Markets, looks at what happens when a law stops the price from adjusting (price ceilings and floors) or changes buyers’ and sellers’ incentives (taxes and subsidies). The shortages, surpluses and lost surplus in this guide reappear there, but they no longer disappear on their own. Test yourself with the practice questions, then use the revision notes and the checklist to consolidate. To review equilibrium and surplus first, see the Topic 2.6 study guide.