"market equilibrium"

• stable state where there is no tendency for the price or quantity to change over time.
  • when quantity demanded equals quantity supplied.
  • When a market is in disequilibrium -> price of a good/service and the quantity transacted are not stable. The price and quantity have a tendency to change over time, until market equilibrium is reached.

Example

• When quantity demanded exceeds quantity supplied, there is a shortage. A shortage causes prices to rise until the equilibrium quantity, where quantity demanded equals quantity supplied, is reached.
• When quantity supplied exceeds quantity demanded, there is a surplus. A surplus causes prices to fall until the equilibrium quantity, where quantity supplied equals quantity demanded, is reached.

Shortage

• At prevailing price P0 the quantity demanded QD is greater than the quantity supplied QS. There is a shortage of QD QS. This represents a disequilibrium in the market.
• Consumers who could not get all they want at the prevailing price P0 would be willing to pay more to compete with other consumers, and this exerts an upward pressure on the price.
• In response to the increase in price, producers would increase the quantity supplied and consumers would decrease the quantity demanded.
• Prices will keep adjusting upwards until the quantity demanded equals the quantity supplied at a new equilibrium where the price is P1 and the quantity is Q1.