📦 Price above equilibrium
The horizontal line meets the demand curve on the left and the supply curve on the right, so Qs is to the right of Qd. The gap between them is the surplus.
Price Determination » Disequilibrium: Shortages and Surpluses
What you'll learn this session
Study time: 30 minutes
Cambridge spec: 2.4.3
- What market disequilibrium is, and the difference between a shortage and a surplus
- How to find the size of a shortage or surplus from a demand and supply schedule
- How to draw and read disequilibrium on a diagram
- How the price moves back towards equilibrium
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Unlock This CourseWhen the market is out of balance
Shelves left full at the end of the day? Price was set too high - that's a surplus, where supply is greater than demand
Remember, market equilibrium is the price where demand equals supply. But real markets do not always sit at that price. A shop might set a price too high or too low, and then buyers and sellers do not match up.
Key terms:
- Market disequilibrium: a situation where demand does not equal supply at the current price, so the market is out of balance.
- Shortage: when demand exceeds supply at the current price. Buyers want more than sellers will provide.
- Surplus: when supply exceeds demand at the current price. Sellers have more than buyers want to buy.
At a disequilibrium price, quantity demanded and quantity supplied are different. The gap between them is the size of the shortage or surplus.
Reading disequilibrium from a schedule
A school in the country of Ferrin sells notebooks. Here is the made-up market schedule for one week.
| Price per notebook ($) | Quantity demanded | Quantity supplied |
|---|---|---|
| 2 | 900 | 300 |
| 3 | 750 | 450 |
| 4 | 600 | 600 |
| 5 | 450 | 750 |
| 6 | 300 | 900 |
Follow these steps for any price.
- Find the price in the first column.
- Read across to quantity demanded and quantity supplied.
- Decide which is bigger. If demand is bigger, it is a shortage. If supply is bigger, it is a surplus.
- Subtract the smaller number from the bigger number to get its size.
Worked example
At $4, demand is 600 and supply is 600. They are equal, so this is equilibrium and there is no shortage or surplus.
At $5, demand is 450 and supply is 750. Supply is bigger, so there is a surplus of 750 − 450 = 300 notebooks.
At $3, demand is 750 and supply is 450. Demand is bigger, so there is a shortage of 750 − 450 = 300 notebooks.
Notice the pattern. Any price above the equilibrium price gives a surplus. Any price below it gives a shortage. The further the price is from equilibrium, the bigger the gap: at $6 the surplus is 900 − 300 = 600.
Drawing disequilibrium on a diagram
Here is how to draw it in the exam, step by step.
- Draw the axes. Put Price on the vertical axis and Quantity on the horizontal axis.
- Draw a downward-sloping demand curve and label it D.
- Draw an upward-sloping supply curve and label it S.
- Mark where they cross. Label the equilibrium price Pe and the equilibrium quantity Qe.
- Choose a price above Pe. Draw a horizontal line across at that price from the vertical axis until it meets both curves.
- Drop vertical lines from where the horizontal line meets each curve down to the quantity axis. Label them Qd and Qs.
🛒 Price below equilibrium
The horizontal line meets the supply curve on the left and the demand curve on the right, so Qd is to the right of Qs. The gap between them is the shortage.
A quick check: the curve that is further to the right at that price shows the bigger quantity. If the demand curve is further right, it is a shortage. If the supply curve is further right, it is a surplus.
How price moves back towards equilibrium
Sellers with unsold fish cut their prices to clear the crates - that's how a surplus pushes price back to equilibrium
A disequilibrium does not usually last. The price mechanism pushes the market back, because buyers and sellers react to the imbalance.
📉 Surplus: price falls
Sellers are left with unsold goods. To get rid of them, they cut the price. As the price falls, quantity demanded extends and quantity supplied contracts. The surplus shrinks until demand equals supply.
📈 Shortage: price rises
Some buyers go without. Buyers compete, and sellers see they can charge more. As the price rises, quantity supplied extends and quantity demanded contracts. The shortage shrinks until demand equals supply.
Notice that the demand and supply curves do not shift. The market simply moves along the two curves until it reaches equilibrium. This is price acting as a signal and an incentive, as you saw in The Price Mechanism.
In some markets the government stops price from adjusting freely. That is covered in Maximum and Minimum Prices.
A second example
In the fishing port of Dolvan, the made-up daily market for crates of fish looks like this.
| Price per crate ($) | Quantity demanded | Quantity supplied |
|---|---|---|
| 10 | 100 | 20 |
| 20 | 80 | 40 |
| 30 | 60 | 60 |
| 40 | 40 | 80 |
| 50 | 20 | 100 |
Worked example
If the price is $40, supply (80) exceeds demand (40). There is a surplus of 80 − 40 = 40 crates. Fishers cut the price towards $30.
If the price is $10, demand (100) exceeds supply (20). There is a shortage of 100 − 20 = 80 crates. Buyers compete and the price rises towards $30.
Common mistakes
- Mixing up the two words. Remember: a shortage means too little supply, a surplus means too much supply.
- Reading the size from the wrong column. The size is the difference between the two quantities, not one of the quantities.
- Saying the curves shift when the price changes. A price change moves the market along the curves.
- Saying a high price always means a shortage. A price above equilibrium gives a surplus.
Exam-style question
The table shows the market for taxi rides in the made-up city of Valmora on a Saturday night.
| Price per ride ($) | Quantity demanded | Quantity supplied |
|---|---|---|
| 6 | 1,200 | 400 |
| 8 | 1,000 | 600 |
| 10 | 800 | 800 |
| 12 | 600 | 1,000 |
(a) Define market disequilibrium. [2 marks]
(b) Calculate the size of the surplus or shortage when the price is $12. [2 marks]
(c) Explain how the price is likely to change if the price is $8. [4 marks]
Model answer
(a) Market disequilibrium is a situation where demand does not equal supply (1) at the current price (1).
(b) At $12 supply is 1,000 and demand is 600 (1). There is a surplus of 1,000 − 600 = 400 rides (1).
(c) At $8 demand is 1,000 and supply is only 600, so there is a shortage of 400 rides (1). Some buyers cannot get a ride, so they compete and will pay more (1). Drivers see they can charge more and are willing to supply more (1). The price rises, supply extends and demand contracts until they are equal at $10 (1).
Exam tip
In a calculation question, write down both quantities from the table before you subtract, so you pick up a method mark even if the subtraction goes wrong.