Market disequilibrium occurs when quantity demanded does not equal quantity supplied at the current price. This imbalance is often caused by changes in demand or supply.
Understanding market disequilibrium
In perfectly competitive markets, equilibrium is achieved when the quantity of a good that consumers are willing and able to buy equals the quantity producers are willing and able to sell at a particular price. This occurs at the intersection of the demand curve and the supply curve, and it determines the equilibrium price and quantity.
However, real-world markets are dynamic and frequently influenced by various factors. As a result, markets often experience disequilibrium, where either a shortage (quantity demanded exceeds quantity supplied) or a surplus (quantity supplied exceeds quantity demanded) arises. These imbalances disrupt the market and cause price pressures that lead to adjustments over time.
Market disequilibrium is not static. It is typically a temporary condition that prompts corrective movements in price and quantity as buyers and sellers respond to changes in market conditions. The most common causes of disequilibrium are shifts in supply and demand due to external or internal factors.
Shifts in demand and supply: the root of disequilibrium
In competitive markets, prices act as signals that help coordinate the actions of buyers and sellers. But when either the demand curve shifts or the supply curve shifts, the old equilibrium is no longer valid. These shifts result in new quantities being demanded or supplied at the original market price, leading to imbalances.
Demand-side changes and disequilibrium
When there is a change in a non-price determinant of demand, the entire demand curve shifts. This means that consumers now want to buy more or less of the good at every price level. The market is pushed into disequilibrium until prices and quantities adjust.
Factors that increase demand (rightward shift):
Increase in consumer income (for normal goods)
Rising popularity or favorable change in consumer tastes
Increase in the price of a substitute good
Decrease in the price of a complementary good
Expectations of future price increases
Growth in population or market size
At the original equilibrium price, the quantity demanded now exceeds the quantity supplied. This creates a shortage, putting upward pressure on price.
Example: Imagine a new health report reveals that avocados significantly improve heart health. As a result, more consumers want to buy avocados. The demand curve shifts rightward. If the price of avocados remains at its original level, the market will experience a shortage—too many buyers, not enough supply.
Factors that decrease demand (leftward shift):
Decrease in consumer income (for normal goods)
Fall in the price of a substitute good
Rise in the price of a complementary good
Negative shift in consumer preferences
Expectations of future price drops
Decline in population or target demographic
If supply remains unchanged, a leftward shift in demand causes a surplus. Fewer consumers want to purchase the good at the existing price, and the unsold inventory accumulates.
Example: If a fitness trend causes people to avoid sugary drinks, demand for soda drops. At the original market price, producers are supplying more soda than consumers want to buy, creating a surplus that leads to downward price pressure.
Supply-side changes and disequilibrium
Just like demand, changes in non-price determinants of supply shift the entire supply curve. A shift in supply alters the quantity producers are willing and able to sell at each price level, causing a mismatch with existing demand.
Factors that increase supply (rightward shift):
Technological improvements that enhance production
Decrease in input costs, such as labor or raw materials
Favorable weather conditions (for agricultural goods)
Government subsidies to producers
Entry of new firms into the market
When supply increases and demand remains constant, the market faces a surplus. More goods are available than consumers are willing to buy at the current price.
Example: If farming technology allows a farm to double its crop yield, the supply of corn increases. However, if consumers don’t want to buy more corn at the same price, the market ends up with an oversupply, creating a surplus that pressures the price downward.
Factors that decrease supply (leftward shift):
Rising production costs (e.g., higher wages or more expensive raw materials)
Natural disasters or bad weather
Government-imposed taxes or regulations
Exit of firms from the market
Supply chain disruptions
A decrease in supply, if demand is unchanged, leads to a shortage. Producers offer fewer goods at the original price, while consumers still want to buy the same amount, causing upward price pressure.
Example: A drought destroys a significant portion of a region’s coffee crop. Supply plummets, but demand stays the same. At the old price, there's a shortage, leading to higher prices for coffee beans in the short term.
Real-world examples of market disequilibrium
Understanding how disequilibrium occurs in real markets helps students visualize these abstract concepts. Below are some key examples where shifts in supply or demand caused significant market disruptions.
Supply disruptions from natural disasters
Natural events like earthquakes, hurricanes, or floods can suddenly reduce the availability of goods, shifting the supply curve leftward and causing shortages.
Example: After Hurricane Katrina in 2005, many oil refineries in the Gulf of Mexico were shut down. The sudden supply shock in the gasoline market created immediate shortages across the country, with gas prices soaring as a result.
Demand booms leading to surpluses
When firms overestimate long-term demand, they may increase production too quickly. If the demand boom was only temporary, the market ends up with a surplus.
Example: A sudden global craze for a toy like fidget spinners can drive a rapid increase in demand. Manufacturers scale up production, but if consumer interest fades quickly, they are left with unsold inventory, resulting in surplus and falling prices.
Technological advancements causing supply shifts
Technology can make production more efficient, significantly increasing supply. If demand doesn’t increase at the same rate, surpluses result.
Example: With improvements in 3D printing, the cost of producing custom phone cases drops dramatically. Producers flood the market, but demand remains the same, leading to a glut of cases and a surplus.
Temporary nature of market disequilibrium
While disequilibrium is common, it is typically temporary in well-functioning competitive markets. Market participants respond to imbalances by adjusting their behaviors, leading to self-correction through changes in price and quantity.
How surpluses are resolved
When a surplus exists:
There is excess supply at the current price.
Sellers are motivated to reduce prices to attract buyers.
Lower prices lead to an increase in quantity demanded and a decrease in quantity supplied.
This continues until the surplus is eliminated and equilibrium is restored.
Example: A clothing retailer overestimates winter coat demand and has leftover inventory in spring. To clear excess stock, it offers deep discounts. Lower prices draw more buyers, and eventually, the surplus is sold off.
How shortages are resolved
When a shortage exists:
There is excess demand at the current price.
Buyers compete for the limited quantity, causing prices to rise.
Higher prices reduce quantity demanded and encourage more supply.
The market returns to equilibrium as the shortage disappears.
Example: A new video game console is launched and quickly sells out. Retailers raise prices, which discourages some buyers and motivates other sellers to enter the market or increase supply, resolving the shortage.
The role of expectations and adjustment timing
Price and quantity adjustments don’t always happen instantly. Several factors can delay the return to equilibrium:
Menu costs: Firms may be reluctant to change prices due to the cost of printing new menus, labels, or updating systems.
Sticky prices: Wages and contracts may be fixed in the short run, slowing response to changing conditions.
Incomplete information: Market participants might not immediately recognize changes in supply or demand conditions.
In the short run, prices and outputs are often less flexible, which means disequilibrium can persist. However, in the long run, markets tend to adjust more fully as firms can alter production levels, enter or exit markets, and consumers can find substitutes or change behavior.
Example: A spike in oil prices due to geopolitical instability may cause a temporary shortage. Over time, as consumers shift to fuel-efficient cars and oil companies ramp up production, the market gradually returns to equilibrium.
Short run vs long run in disequilibrium
Understanding the distinction between short-run and long-run market adjustments helps explain why disequilibrium may last longer in some cases.
Short run
Limited flexibility: Firms cannot quickly increase or decrease output.
Price and wage rigidities may prevent immediate adjustments.
Fixed resources limit responsiveness.
Example: A coffee farmer cannot instantly grow more crops when prices rise because it takes months for plants to mature. This creates short-run shortages that persist until supply can adjust.
Long run
All inputs become variable: Firms can scale up production or exit the market entirely.
New firms can enter or exit based on profitability.
Consumers adapt more completely to new prices or goods.
Example: If electric vehicles remain in high demand for several years, more firms will enter the EV market, technology will improve, and consumers will adjust preferences, ultimately leading to a new long-run equilibrium.
FAQ
Yes, market disequilibrium can occur in both perfectly competitive and imperfectly competitive markets, although the adjustment processes may differ. In perfectly competitive markets, many buyers and sellers interact, and prices are highly responsive to changes in supply and demand. Disequilibrium in such markets—such as a surplus or shortage—is usually temporary, as price changes happen quickly and efficiently due to strong competitive pressures. In contrast, in imperfectly competitive markets (like monopolies or oligopolies), prices may not adjust as rapidly. Firms may have pricing power, and strategic behavior such as price-setting, collusion, or production quotas can delay the return to equilibrium. Additionally, barriers to entry, brand loyalty, and lack of substitutes can make quantity and price adjustments less responsive. While both types of markets can experience disequilibrium, the mechanisms and speed of restoring equilibrium are typically much slower in imperfectly competitive environments due to limited competition and price rigidity.
Inventories play a critical buffer role in managing short-term market disequilibrium, especially for firms facing sudden changes in demand or supply. When there is an unexpected increase in demand, firms with existing inventory can respond immediately by releasing stored goods into the market, temporarily alleviating shortages and minimizing upward pressure on prices. This helps meet consumer needs while the firm ramps up production. Conversely, in the case of a demand drop leading to a surplus, firms can slow or halt production and use their inventory systems to store excess supply rather than flooding the market and crashing prices. Efficient inventory management allows firms to smooth out fluctuations, maintain price stability, and avoid the high costs associated with overproduction or stockouts. While inventories don’t permanently eliminate disequilibrium, they help firms respond more flexibly and strategically to short-term imbalances, buying time until long-run supply or demand adjustments can occur.
Expectations about future prices can significantly affect present supply and demand behavior, leading to temporary disequilibrium. If consumers expect prices to rise in the near future, they may increase their current demand, shifting the demand curve to the right. This can cause a shortage at current prices, as suppliers may not have anticipated the sudden spike in quantity demanded. On the supply side, if producers expect future prices to rise, they might withhold current supply to sell more later at higher prices, effectively shifting the current supply curve to the left. This can further exacerbate the shortage. Conversely, if consumers anticipate falling prices, they may delay purchases, decreasing current demand and causing a surplus. Similarly, suppliers expecting lower future prices may flood the market now, increasing supply prematurely. These expectation-driven behaviors often disrupt existing equilibrium, creating temporary imbalances that correct once actual price movements confirm or negate expectations.
Even when prices are theoretically flexible, disequilibrium can persist due to several real-world frictions. First, menu costs—the costs of physically changing prices (like updating tags, menus, or systems)—may lead firms to delay price adjustments, especially for small changes. Second, contractual agreements such as long-term wage contracts or fixed-price supply deals can lock in prices, limiting the speed at which supply or demand adjusts. Third, informational delays can prevent firms and consumers from immediately recognizing a shift in the market, causing them to operate based on outdated expectations. Fourth, behavioral factors like price anchoring or reluctance to raise prices due to fear of consumer backlash may also slow adjustments. Additionally, in some industries, adjusting production or supply chains may take time due to logistical or regulatory constraints. These factors combined mean that even in competitive markets where prices can theoretically move freely, equilibrium may not be restored instantly, prolonging the effects of disequilibrium.
Seasonal variations frequently lead to predictable but recurring patterns of market disequilibrium. In many industries—especially agriculture, retail, and tourism—supply and demand fluctuate significantly throughout the year due to weather patterns, holidays, school calendars, and cultural habits. For example, in agriculture, harvest seasons cause a sudden increase in supply, which can temporarily exceed demand and lead to seasonal surpluses and falling prices. In contrast, during off-seasons, supply drops while demand may remain steady or increase, creating seasonal shortages. In retail, demand spikes during the holiday season often cause shortages if firms underestimate consumer needs, whereas post-holiday periods frequently experience surpluses due to leftover inventory. While these imbalances are often anticipated, they still result in short-term disequilibrium before prices and quantities adjust. Businesses attempt to manage these fluctuations through forecasting, promotional pricing, inventory planning, and flexible supply arrangements, but perfect balance is rarely achieved, making seasonal disequilibrium a regular and expected part of many markets.
Practice Questions
A sudden increase in consumer preference for electric scooters causes the demand curve for scooters to shift right. Explain how this change affects market equilibrium and describe the process by which the market adjusts to restore equilibrium.
When consumer preference for electric scooters increases, the demand curve shifts to the right. At the original equilibrium price, quantity demanded now exceeds quantity supplied, resulting in a shortage. This puts upward pressure on the price. As the price rises, quantity demanded decreases and quantity supplied increases. The market continues to adjust until a new equilibrium is reached at a higher price and quantity. This process reflects how markets self-correct from disequilibrium through price changes driven by consumer and producer behavior in response to the shortage.
A drought reduces the wheat harvest across several states. Using a supply and demand framework, explain how this affects the wheat market in the short run and how disequilibrium is resolved.
The drought decreases the overall supply of wheat, causing the supply curve to shift left. At the original price, quantity supplied falls below quantity demanded, creating a shortage. The shortage places upward pressure on the price of wheat. As prices rise, consumers reduce their quantity demanded while producers are incentivized to supply more, if possible. This process continues until quantity demanded equals the new, lower quantity supplied. The market reaches a new equilibrium at a higher price and lower quantity. This illustrates how supply shocks create disequilibrium and how prices adjust to restore balance over time.
