Definition
Disequilibrium is a condition of a market where a significant shift in the demand or supply curve has occurred, but the market price has not yet adjusted sufficiently to clear the market. This situation results in an imbalance where there is either an excess of demand (shortage) or an excess of supply (surplus). Markets are often considered to be in a constant state of disequilibrium due to the continuous changes in the factors affecting demand and supply.
Examples
- Housing Market: During the 2008 financial crisis, a sharp decrease in demand and an increase in supply led to significant disequilibrium in the housing market. Falling prices could not immediately clear the surplus of homes for sale.
- Stock Market: A sudden economic event like the collapse of a major corporation may cause a rapid shift in demand or supply, leading to significant price volatility and disequilibrium in the stock market.
- Oil Market: Geopolitical events can affect oil supply, causing drastic changes in supply and/or demand. Periods where oil prices have swung widely reflect disequilibrium until the market finds a new stable price level.
Frequently Asked Questions
Q1: What are the main causes of market disequilibrium? A: Market disequilibrium can result from sudden changes in consumer preferences, technological advancements, governmental policies, or external economic shocks that affect either demand or supply.
Q2: How do businesses adapt to disequilibrium conditions? A: Businesses can adapt by adjusting prices, changing production rates, or modifying inventory levels to align more closely with the current demand or supply situation.
Q3: Can disequilibrium be beneficial? A: While it often represents inefficiencies, disequilibrium can also signal necessary adjustments and corrections in the market, thus prompting innovation and better resource allocation in the long run.
Q4: Is market equilibrium ever fully achieved? A: The concept of perfect equilibrium is mostly theoretical, as real markets are dynamic with constant changes. Short periods of equilibrium can exist, but disequilibrium is often the norm.
Q5: How do government interventions affect market equilibrium? A: Government policies such as price floors, price ceilings, or subsidies can create or correct disequilibrium by influencing either demand or supply artificially.
Related Terms
- Equilibrium: A state in a market where the quantity demanded equals the quantity supplied, resulting in stable prices.
- Supply and Demand Curve: Graphical representations of the relationship between quantities supplied and demanded at various price levels.
- Price Ceiling: A maximum price set by the government, below the market equilibrium price, leading to potential shortages.
- Price Floor: A minimum price set by the government, above the market equilibrium price, leading to potential surpluses.
- Shortage: A situation where demand exceeds supply at the current price, often leading to upward price pressure.
- Surplus: A situation where supply exceeds demand at the current price, often leading to downward price pressure.
Online Resources
Suggested Books for Further Studies
- “Microeconomics” by Paul Krugman and Robin Wells
- “Principles of Economics” by N. Gregory Mankiw
- “Basic Economics” by Thomas Sowell
- “Economics in One Lesson” by Henry Hazlitt
Fundamentals of Disequilibrium: Economics Basics Quiz
Thank you for exploring the intricacies of market disequilibrium and applying your knowledge with our quiz. Continue striving for clarity and comprehension in the dynamic world of economics!
