Question

Distinguish between Equilibrium and disequilibrium. Briefly assess what the outcome is when the quantity supplied (Qs) exceeds the quantity demanded (Qd)? And what happens when the quantity demanded (Qd) exceeds the quantity supplied (Qs)? Offer a brief solution to how the disequilibrium in quantity supplied vs. quantity demanded; or quantity demanded vs. quantity supplied be resolved? How is price determined by demand and supply? Advise what causes price to change? Support your answer with an illustration of the point- of-equilibrium curve, thereby showing the shifts in the demand/supply curves.

Answer 1

Equilibrium is a situation in which the market clears i.e. there remains neither surplus nor shortage.

Disequilibrium is a situation in which market does not clear i.e. there remains either surplus or shortage.

when the quantity supplied (Qs) exceeds the quantity demanded (Qd), the outcome is disequilibrium with surplus.

when the quantity demanded (Qd) exceeds the quantity supplied (Qs), the outcome is disequilibrium with shortage.

The disequilibrium with surplus can be resolved by decreasing price so that supply decreases, demand increases until demand and supply become equal.

The disequilibrium with shortage can be resolved by increasing price so that supply increases, demand decreases until demand and supply become equal.

Price is determined at the intersection of demand and supply curves i.e. where demand = supply.

The main cause of price change is the change in demand or supply.

When there is increase in demand i.e. rightward shift then equilibrium price increases and quantity increases.

When there is increase in supply i.e rightward shift then equilibrium price decreases and quantity increases.