Disequilibrium

Published Apr 9, 2023

Definition of Disequilibrium

Disequilibrium is a condition in which the quantity demanded, and the quantity supplied of a good or service in a market are not equal. This mismatch leads to a surplus or shortage of the good or service, which can cause prices to adjust over time as market forces try to bring supply and demand back into balance (i.e., equilibrium).

Example

To illustrate disequilibrium, let’s consider the market for smartphones. Suppose that there is a sudden increase in the popularity of a particular brand or model of smartphone, leading to an increase in demand. However, the manufacturers of this brand or model are slow to respond to the increased demand, resulting in a shortage of smartphones in the market. As a result, consumers who want this particular brand or model of smartphone are unable to purchase it at the usual price and may be forced to purchase a substitute or wait until the shortage is resolved. At the same time, the shortage may lead to an increase in the price of the smartphones in question.

Alternatively, suppose that there is a sudden decrease in the popularity of a particular brand or model of smartphone, leading to a decrease in demand. However, the manufacturers of this brand or model continue to produce smartphones at the same rate, resulting in a surplus of smartphones in the market. As a result, the manufacturers may be forced to drop the price in order to sell their excess inventory or may slow down production until demand picks up again.

Why Disequilibrium Matters

Disequilibrium is a temporary condition in a market, but it can have significant consequences for both buyers and sellers. When there is a shortage, buyers may be forced to pay higher prices or purchase substitute goods, while sellers may see an opportunity to increase profits. Conversely, when there is a surplus, buyers may be able to purchase goods at lower prices, while sellers may be forced to reduce prices or cut production.

In the long run, disequilibrium can act as a signal to market participants, encouraging producers to increase or decrease output or encouraging consumers to change their preferences. In order to achieve a more efficient outcome, it is important for markets to be able to adjust to changes in supply and demand over time.