DISEQUILIBRIUM

Disequilibrium characterizes a market that is not in equilibrium, meaning there is a difference between the quantity demanded and the quantity supplied. It usually occurs when internal and/or external forces prevent market equilibrium from being reached or cause the market to fall out of balance. This can be a short-term byproduct of a change in variable factors or a result of long-term structural imbalances.
There are two types of disequilibrium:

Excess supply

If the price is too high, higher than the price of equilibrium, excess supply will be created within the market. Thus there will be an allocative inefficiency.

As we have shown in previous posts, the quantity supplied will be greater than the quantity demanded. Thus the supplier might look to lower the price in order to attract demand for the leftover goods.

Excess demand

When the price is set below the price of equilibrium then excess demand will occur. Because the price is so low, too many consumers want the good while the producers aren't making enough of it.

The solution is, of course, to raise the price in order for producers to be able to supply more of the good.

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EQUILIBRIUM

We have previously described what supply and demand are and how the price fluctuates in order that the quantity demanded and the quantity supplied level out. Thus when these two are equal we reach a desired outcome which economists call equilibrium. At this point the allocation of goods/resources is at its most efficient because at the given price producers are selling all the goods that they have produced and buyers are getting all the goods they have demanded. In this state the market benefits as a whole because when an equilibrium is reached the number of transactions being made is the highest possible. Picture the case of a shop that sells TVs. As you can see in the table below, the higher the price the lower the quantity demanded but the higher the quantity supplied and vice versa. In each case the amount of transactions being made can be expressed by the formula: Number of Transactions = min(Quantity Demanded, Quantity Supplied) This is obviously happening be...

TYPES OF RESOURCES

There are many representations of the resources throughout the world of science and technology. An economist will tell you that they are goods and services used to produce valuable products that meet human needs and wants. A biologist will define them as substances that are required by living organisms for normal growth, maintenance and reproduction. Even a computer scientist will tell you that resources are any physical or virtual components of limited availability within a computer, used for creating a system. Of course, each interpretation is closely tied to its respective field of study, covering only what is relevant to that particular field. But all these definitions have something in common, which is the fact that resources are the means through which a desired product, state or outcome is achieved. In economics the resources are human-centered and they are used in order to create output ( goods and services ) through which we can satisfy our needs and wants. Because ...

OPPORTUNITY COST

Our lives are filled with everyday economic decisions. Whether you choose to spend one hour watching a TV show instead of studying or whether you choose to buy a book over music album you are essentially taking into account the opportunity cost of each. The time you spend watching TV can't be used to study and the money you spend on the book can't be used to buy the album. The opportunity cost is essentially the benefits you forgo when taking a certain set of actions. Thus we can define: Opportunity cost - When utilizing a certain resource, the opportunity cost represents the benefits of the next-highest-valued alternative use of that resource. It is important to understand that when we talk about the opportunity cost we only take into account the benefits of the next highest valued resource instead of adding up all of the other alternatives. The opportunity cost is often expressed as the difference between the expected return value of the two options: Oppor...

Introduction to Economics

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