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MODULE 1.6 Market Equilibrium,

disequilibrium, and

Changes in Equilibrium

In this Module, you will learn to:
• Define market equilibrium and identify it on a supply and demand graph
• Explain how the equilibrium price and quantity are determined
• Define and calculate a market surplus and a market shortage
• Explain how prices adjust to restore equilibrium
• Explain how changes in demand or supply affect equilibrium price and equilib-
rium quantity

In the previous two Modules, we learned about the demand curve, the
supply curve, and the set of factors that shift each curve. We can now
put these elements together to show how they determine the price and
quantity sold in the market for a good or service.

Supply, Demand,

and Equilibrium
Roberto Machado Noa/Getty Images In competitive markets, the forces of supply and demand tend to move

price and quantity toward what economists call equilibrium. An eco-
nomic situation is in equilibrium when no individual would be better

supermarket; there are long lines at the checkout counters. Then one of
Over time, competitive markets, like grocery lines, off doing something different. Imagine a busy afternoon at your local
settle into equilibrium. the previously closed registers opens. The first thing that happens is a
rush to the newly opened register. But soon enough, things settle down
and shoppers have rearranged themselves so that the line at the newly opened register
An economic situation is in
equilibrium when no individual is about as long as all the others. When all the checkout lines are the same length, and
would be better off doing none of the shoppers can be better off by doing something different, this situation is in
something different. Equilibrium equilibrium.
in a competitive market occurs The concept of equilibrium helps us understand the price at which a good or ser-
where the supply and demand vice is bought and sold as well as the quantity of the good or service bought and sold.
curves intersect. A competitive market is in equilibrium when the price has moved to a level at which
the quantity of a good demanded equals the quantity supplied. At that price, no seller
A competitive market is in would gain by offering to sell more or less of the good, and no buyer would gain by
equilibrium when the price has offering to buy more or less of the good. Recall the shoppers at the supermarket who
moved to a level at which the cannot make themselves better off (cannot save time) by changing lines. Similarly, at
quantity demanded of a good the market equilibrium, the price has moved to a level that exactly matches the quan-
equals the quantity supplied
of that good. The price at tity demanded by consumers to the quantity supplied by sellers.
which this takes place is the The price that matches the quantity supplied and the quantity demanded is the
equilibrium price, also referred equilibrium price; the quantity bought and sold at that price is the equilibrium
to as the market-clearing price. quantity. The equilibrium price is also known as the market-clearing price: it is the price
The quantity of the good that “clears the market” by ensuring that every buyer willing to pay that price finds a
bought and sold at that price is seller willing to sell at that price, and vice versa. So how do we find the equilibrium
the equilibrium quantity. price and quantity?

46 Macro • Unit 1 Basic Economic Concepts
Copyright © Bedford, Freeman & Worth Publishers.
Strictly for use with its products. For review purposes only. Not for redistribution.

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