36 Equilibrium, Surplus, and Shortage
What you’ll learn to do: explain and graphically illustrate market equilibrium, surplus, and shortage
In this section, you’ll learn how supply and demand interact to determine the ideal price and quantity of a good in a market. When a good is not sold at its ideal price, a shortage or a surplus may be the result.
Learning Objectives
- Define equilibrium price and quantity and identify them in a market
- Define surpluses and shortages and explain how they cause the price to move towards equilibrium
Demand and Supply
In order to understand market equilibrium, we need to start with the laws of demand and supply. Recall that the law of demand says that as price decreases, consumers demand a higher quantity. Similarly, the law of supply says that when price decreases, producers supply a lower quantity.
Because the graphs for demand and supply curves both have price on the vertical axis and quantity on the horizontal axis, the demand curve and supply curve for a particular good or service can appear on the same graph. Together, demand and supply determine the price and the quantity that will be bought and sold in a market. These relationships are shown as the demand and supply curves in Figure 1, which is based on the data in Table 1, below.
| Price, Quantity Demanded, and Quantity Supplied | ||
|---|---|---|
| Price (per gallon) | Quantity demanded (millions of gallons) | Quantity supplied (millions of gallons) |
| $1.00 | 800 | 500 |
| $1.20 | 700 | 550 |
| $1.40 | 600 | 600 |
| $1.60 | 550 | 640 |
| $1.80 | 500 | 680 |
| $2.00 | 460 | 700 |
| $2.20 | 420 | 720 |
If you look at either Figure 1 or Table 1, you’ll see that at most prices the amount that consumers want to buy (which we call the quantity demanded) is different from the amount that producers want to sell (which we call the quantity supplied). What does it mean when the quantity demanded and the quantity supplied aren’t the same? The answer is: a surplus or a shortage.
Surplus or Excess Supply
Let’s consider one scenario in which the amount that producers want to sell doesn’t match the amount that consumers want to buy. Consider our gasoline market example. Imagine that the price of a gallon of gasoline were $1.80 per gallon. This price is illustrated by the dashed horizontal line at the price of $1.80 per gallon in Figure 2, below.
At this price, the quantity demanded is 500 gallons, and the quantity of gasoline supplied is 680 gallons. You can also find these numbers in Table 1, above. Now, compare the quantity demanded and quantity supplied at this price. Quantity supplied (680) is greater than quantity demanded (500). Or, to put it in words, the amount that producers want to sell is greater than the amount that consumers want to buy. We call this a situation of excess supply (since Qs > Qd) or a surplus. Note that whenever we compare supply and demand, it’s in the context of a specific price—in this case, $1.80 per gallon.
With a surplus, gasoline