Interaction of demand and supply– markets disequilibrium

Diagram 1 : Market disequilibrium - excess supply


If for some reason companies thought that consumers were prepared to pay a price of P1 and supplied Q1 units to the market, the market would be in disequilibrium. At a price of P1 under present circumstances, consumers are only planning to buy Q0 units.

As such companies will build up excess stocks, there is disequilibrium due to excess supply.

Diagram 2 : Market disequilibrium - excess demand


If the price was set at P0, there will be disequilibrium – this time of excess demand.

Consumers are now keen to snap up what they consider to be a pretty good deal. However, given the low prices, supplies are fairly low and this is not enough to meet demand. Suppliers will run out of stocks far quicker than they had expected.