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MARKET EQUILIBRIUM AND DISEQUILIBRIUM
It’s the desire of every market to be at equilibrium. Equilibrium means a state of balance.
Equilibrium is the point where quantity demanded is equal to quantity supplied. In perfectly
competitive markets the prices are determined through the interaction of the forces of demand
and supply. Prices adjusts upwards or downwards to achieve equilibrium. The corresponding
price to the equilibrium point is the equilibrium price and the corresponding quantity is the
equilibrium quantity.
A fall in price below the equilibrium prices leads to demand exceeding supply. This discourages
suppliers, who eventually withdraw from the market, and at the same time it encourages
consumers, who increase their demand for the commodity. Excess demand hence pushes up the
prices of the commodities back to equilibrium. An increase in price above the equilibrium prices
discourages the consumers and this creates a situation of excess supply hence pushing the prices
down back to equilibrium.
Qd = Qs
Qd = a – bP where a,b > 0. …………………… . . (i)
Qs = -c + dp where c,d >0. ……………………… (ii)

p Qd = a - bP QS = -c + dP
EXCESS SUPPLY
PE EQUILIBRIUM POINT
EXCESS DEMAND
QE
QD QS
Example
Given the following economic functions calculate the Equilibrium price and Quantity.
Qd= 120 – 2P
QS = 60 + 4P
At equilibrium, Qd = Qs
∴ 120 – 2 = 60 + 4
6 = 60
∴ = 10
Substituting P = 10, in either equation.
Qd = 120 – 2 (10) = 120 – 20 = 100 = Qs
CAUSES OF MARKET DISEQUILIBRIUM
Price Control is the main cause of market disequilibrium. Price control is deliberate government
intervention to artificially determine prices of commodities in the market. The price control
measures are the price floors and the price ceilings. Reasons for government control are;
a) Stabilize prices and supplies of essential commodities

b) Reduce income inequalities by balancing welfare through imposition of minimum wages
c) Direct investment by increasing relative profitability while restricting competitors because
any prices, other than the legislated prices, are not allowed.
d) Protect the purchasing power of consumers especially the low-income earners.
e) Protect domestic industries against the highly competitive foreign influence-the infant
industry argument.
a) PRICE CEILING
A price ceiling is the highest price a commodity can be sold at. Usually the price is set below the
equilibrium. The governments usually set by law a maximum price to stop the price of a
particular good from rising to an unacceptable level. This ensures that the low income consumer
is protected from exploitation. Price ceiling set below the market equilibrium creates excess
demand since equilibrium price already hurts consumers.
Consequences of a price ceiling
a) Hoarding and smuggling of products to other countries where prices are relatively high.
This will further create artificial shortages
b) Black market arise which involves selling a product at a price other than the
legislated/statutory price (in an illegal market) preferably to those willing to pay higher
prices
c) Low investments as producers are not allowed to maximize their profits and may opt to
invest in industries whose product prices are not controlled.
d) Loss of foreign exchange arising from importation of essential commodities whose
domestic supply is insufficient.
b) PRICE FLOORS
A price floor is the lowest price a good or service can be sold at. The price is usually set above
the equilibrium price e.g. wage legislation, NCPB for maize. The government does this in order
to guarantee producers a certain return on their sales. This is common for agricultural products.
Price floor set above the market equilibrium causes a glut since equilibrium price already hurts
producers.
Consequences of a price floor.

a) Excess supply over demand for the commodity
b) Increase in government spending programmed arising from establishment of buying agencies
such as the NCPB, which may not be efficient or cost-effective.
c) Dumping which is a kind of price discrimination whereby the government buys and exports
the surplus of a commodity at lower prices

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MARKET EQUILIBRIUM AND DISEQUILIBRIUM

Qd = a – bP where a,b > 0. …………………… . . (i)

Qs = -c + dp where c,d >0. ……………………… (ii)

Substituting P = 10, in either equation.

Qd = 120 – 2 (10) = 120 – 20 = 100 = Qs

CAUSES OF MARKET DISEQUILIBRIUM

a) Stabilize prices and supplies of essential commodities

Consequences of a price floor.

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