1.06 Market Equilibrium, Disequilibrium, and changes in equilibrium

equilibrium quantity

the quantity that will be sold and purchased at the equilibrium price

government intervention

The examples for disequilibrium above are temporary states; the forces of supply and demand will naturally return the market to equilibrium without other interference. An example of interference that can lead to a not-so-temporary disequilibrium is a government policy, like a set price regulation.

Disequilibrium

Whenever markets experience imbalances—creating disequilibrium prices, surpluses, and shortages—market forces drive prices toward equilibrium. A surplus exists when the price is above equilibrium, which encourages sellers to lower their prices to eliminate the surplus. A shortage will exist at any price below equilibrium, which leads to the price of the good increasing.

market equilibrium

a situation in which quantity demanded equals quantity supplied

What type of price control is the minimum wage?

price floor - here is much debate over the minimum wage. In part, this is because the basic supply and demand model suggests that more people would be employed if the equilibrium price below the price floor of minimum wage could be reached. Of course, how many of the surplus (unemployed) laborers would be happy to work at $4.50 per hour, if that is the equilibrium, is part of the debate.

equilibrium price

the price in a market at which the quantity demanded and the quantity supplied of a good are equal to one another; this is also called the "market clearing price."

shortage

when the quantity demanded of a good, service, or resource is greater than the quantity supplied

surplus

when the quantity supplied of a good, service, or resource is greater than the quantity demanded -a surplus leads to decreases in price and in quantity supplied until the market reaches equilibrium.