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May 28, 2024 

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AD: The abbreviation for aggregate demand, which is the total (or aggregate) real expenditures on final goods and services produced in the domestic economy that buyers would willing and able to make at different price levels, during a given time period (usually a year). Aggregate demand (AD) is one half of the aggregate market analysis; the other half is aggregate supply. Aggregate demand, relates the economy's price level, measured by the GDP price deflator, and aggregate expenditures on domestic production, measured by real gross domestic product. The aggregate expenditures are consumption, investment, government purchases, and net exports made by the four macroeconomic sectors (household, business, government, and foreign).

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MARKET DISEQUILIBRIUM:

The state of the market that exists when the opposing market forces of demand and supply do achieve a balance and there is an inherent tendency for change. Market disequilibrium results if the market is not in equilibrium. More specifically, market disequilibrium results if the demand price is not equal to the supply price and the quantity demanded is not equal to the quantity supplied.
In general, disequilibrium results if opposing forces are not in balance. For market disequilibrium, the opposing forces that are out of balance are demand and supply. The result of the imbalance between these two forces is the existence of a shortage or surplus, which induces a change in the price.

Shortage and Surplus

Market disequilibrium is characterized by either a surplus or a shortage. Both arise due to the inequality between quantity demanded and quantity supplied.
  • Shortage: A shortage exists if the quantity demanded exceeds the quantity supplied at the current market price. This condition emerges if the market price is below the equilibrium price. With a market shortage, buyers are unable to buy as much of the good as they would like at the current price. As such, they are motivated to raise the price.

  • Surplus: A surplus exists if the quantity supplied exceeds the quantity demanded at the current market price. This condition emerges if the market price is above the equilibrium price. With a market surplus, sellers are unable to sell as much of the good as they would like at the current price. As such, they are motivated to lower the price.
Market disequilibrium exists with a surplus or shortage because the price does not remain unchanged. The imbalance between quantity demanded and quantity supplied prompts the price to change. A shortage prompts the price to rise and a surplus causes the price to fall.

Out of Balance

The 8-Track Tape Market

Market disequilibrium can be illustrated using the market for 8-track tapes displayed in this exhibit. This graph was generated after long hours attending the 88th Annual Trackmania 8-Track Tape Collectors Convention at the Shady Valley Exposition Center.
  • Shortage: Consider first how a shortage is created at a 30 cent price. Click the [Shortage] button to highlight this price. At 30 cents, the quantity demanded is 600 tapes and the quantity supplied is 200 tapes. This is not equilibrium. The buyers cannot buy all that they want. They want to buy 600 tapes, but only 200 tapes are offered for sale by the sellers. This shortage motivates buyers to offer a higher price. This shortage is clearly NOT equilibrium.

  • Surplus: Now consider how a surplus is created at a 70 cent price. Click the [Surplus] button to highlight this price. At 70 cents, the quantity demanded is 200 tapes and the quantity supplied is 600 tapes. This is not equilibrium. The sellers cannot sell all that they want. They want to sell 600 tapes, but only 200 tapes are being purchased by the buyers. This surplus motivates sellers to charge a lower price. This shortage is clearly NOT equilibrium.
For sake of completeness and for purposes of comparison, the equilibrium condition in the market can be identified by clicking the [Balance] button. Doing so reveals an equilibrium price of 50 cents and an equilibrium quantity (without shortage or surplus) of 400 tapes.

<= MARKET DEMANDMARKET EFFICIENCY =>


Recommended Citation:

MARKET DISEQUILIBRIUM, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: May 28, 2024].


Check Out These Related Terms...

     | market equilibrium | disequilibrium price | shortage | surplus | equilibrium | self correction, market | equilibrium price | equilibrium quantity | market clearing | stable equilibrium | unstable equilibrium |


Or For A Little Background...

     | market | demand | supply | demand curve | supply curve | demand price | supply price | demand space | supply space | quantity demanded | quantity supplied | law of demand | law of supply |


And For Further Study...

     | comparative statics | market demand | market supply | exchange | competitive market | production possibilities | invisible hand | ceteris paribus | market-oriented economy | marginal analysis | elasticity | utility analysis | short-run production analysis |


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