If the market price is above or below the equilibrium price, the market is in disequilibrium. Disequilibrium occurs when the quantity supplied does not equal the quantity demanded. There are two conditions that are a direct result of disequilibrium: a shortage and a surplus.
A shortage occurs when the quantity demanded is greater than the quantity supplied.
Shortage = Quantity demanded (Qd) > Quantity supplied (Qs)
A surplus occurs when the quantity supplied is greater than the quantity demanded.
Surplus = Quantity supplied (Qs) > Quantity demanded (Qd)
For example, say at a price of $2.00 per bar, 100 chocolate bars are demanded and 500 are supplied. In this case, there would be a surplus of 400 chocolate bars.
Now consider a price of $0.40 per bar, with 500 bars demanded and 100 bars supplied. In this case, there would be a shortage of 400 chocolate bars.
In our example, the current market equilibrium price is $1.20 per bar. Prices above $1.20 per bar would result in a surplus, while prices below $1.20 per bar would result in a shortage. Only at the $1.20 price will the quantity demanded and the quantity supplied be equal, that is, at equilibrium.
|Price per bar||Quantity demanded||Quantity supplied||Surplus||Shortage|