Question

Describe equilibrium, surplus and shortage. For each situation, explain what the relationship is between Qd and Qs, and between S and D. What is causing these relationships to exist?

Answer 1

Equilibrium of a market is defined by the combination of price and quantity where demand curve intersects the supply curve. It can be also be understood as a price level where there is the quantity demanded of a good is equal quantity supplied of a good. Point E0 represents point of market equilibrium in above diagram.

Surplus in any market is basically a situation where there is excess supply of a good at a given price level. That is, a surplus situation is said to exist when at a given price the quantity supplied (Qs) of a good is greater than quantity demanded of a good (Qd). In above diagram, Point E1-E2 represent surplus situation since supply is greater than demand. That is sellers outnumber the buyers.

Shortage in any market is basically reverse of surplus. That is at a given market price the overall quantity demanded (Qd) is greater than quantity supplied (Qs) of a good. In above diagram, Point E3-E4 represent shortage situation since demand is greater than supply.  That is, buyers outnumber the sellers.