Question

What do you understand by market Dis-equilibrium in the Demand and Supply of goods and services, and what phenomena may temporarily cause this imbalance?

Kindly produce the answer in no less than 200 words

Answer 1

Equilibrium is a situation where the forces working in opposite directions are brought to balance.Thus equilibrium refers to a state of rest.

In the context of price determination ,equilibrium refers to a situation in which quantity demanded of a commodity equals the quantity supplied.When the quantity demanded is not equal to the quantity supplied, we say that the market is in disequilibrium.It can occur when actual price is below or above the equilibrium price.This can happen if it is a free market situation where there is no government intervention.But in the real life situations government plays an important role in the economy and intervenes in the functioning of the market and influences the price.It fixes the price by law .

1) Price ceiling.Price ceiling is the maximum legal price which suppliers can charge for a particular good or service.If the price ceiling is set above the equilibrium price there will be excess supply and demand falls.On the other hand if government fixes price less than equilibrium price there will be excess demand and causes disequilibrium.

2) Floor price .Sometimes government may legally fix minimum price at which the sellers may sell a particular good or service.Floor price benefits the supplier.Floor price will motivate the producers to produce more.So supply increases more than demand,and causes disequilibrium.

There are other things that causes disequilibrium are non profit maximizing decisions and sticky prices.

All can create a disequilibrium situation in demand and supply