AP® Macroeconomics review sheet from Aim for Five (aimforfive.com/macro/units/1/1-6)
Unit 1 · Topic 1.6
1.6 Market Equilibrium, Disequilibrium, and Changes in Equilibrium
A market is in equilibrium at the price where quantity demanded equals quantity supplied. At any other price there's a surplus or a shortage, and those push the price back toward equilibrium. When demand or supply shifts, the equilibrium price and quantity change in predictable ways.
Key terms
- equilibrium price
- equilibrium quantity
- surplus
- shortage
- disequilibrium
Finding equilibrium
On a graph with price on the vertical axis and quantity on the horizontal axis, draw a downward-sloping D and an upward-sloping S. Where they cross is the equilibrium. Label the price Pe on the vertical axis and the quantity Qe on the horizontal axis, with dashed lines from the crossing point to each axis.
At Pe, every buyer who wants the good at that price gets it, and every seller who wants to sell at that price can. Nothing pushes the price up or down.
Surpluses and shortages
A surplus happens when the price is above equilibrium: quantity supplied is greater than quantity demanded. Sellers are stuck with unsold goods, so they cut prices. As the price falls, quantity demanded rises and quantity supplied falls until the surplus is gone.
A shortage happens when the price is below equilibrium: quantity demanded is greater than quantity supplied. Buyers compete for too few goods, so the price gets bid up until the shortage disappears.
Size of a surplus = quantity supplied − quantity demanded at that price. Size of a shortage = quantity demanded − quantity supplied at that price. On a graph, it's the horizontal distance between the two curves at that price.
When one curve shifts
On your graph, label the original curves D1 and S1, the new curve D2 or S2, and the old and new equilibrium values P1, Q1 and P2, Q2. Arrows showing the shift direction help readers follow you.
| Change | Equilibrium price | Equilibrium quantity |
|---|---|---|
| Demand increases (D shifts right) | Rises | Rises |
| Demand decreases (D shifts left) | Falls | Falls |
| Supply increases (S shifts right) | Falls | Rises |
| Supply decreases (S shifts left) | Rises | Falls |
When both curves shift
If both curves shift at once, one of the two outcomes can be predicted and the other is indeterminate (it depends on which shift is bigger).
Demand and supply both increase: quantity rises for sure; price could go either way. Demand increases while supply decreases: price rises for sure; quantity could go either way.
A quick check: work out each shift on its own. If both push a variable the same way, you know the answer. If they push opposite ways, that variable is indeterminate.
Worked examples
Try each one yourself first, then open the solution.
- Example 1
Equilibrium, surplus and shortage from a table
In the market for smoothies: at $1, quantity demanded is 100 and quantity supplied is 20; at $2, 80 and 40; at $3, 60 and 60; at $4, 40 and 80; at $5, 20 and 100. (a) Find the equilibrium. (b) What happens at a price of $5? (c) What happens at $2?
Show the solutionHide the solution
- Step 1: (a) Look for the price where quantity demanded equals quantity supplied: at $3, both are 60. Equilibrium is Pe = $3, Qe = 60.
- Step 2: (b) At $5, quantity supplied (100) is greater than quantity demanded (20). That's a surplus of 100 − 20 = 80 smoothies. Sellers will cut the price toward $3.
- Step 3: (c) At $2, quantity demanded (80) is greater than quantity supplied (40). That's a shortage of 80 − 40 = 40 smoothies. The price will be bid up toward $3.
Answer: (a) $3 and 60 smoothies. (b) Surplus of 80; the price falls. (c) Shortage of 40; the price rises.
- Example 2
Two shifts at once (classic trap)
A new study says blueberries are very healthy, and at the same time a better harvesting machine lowers the cost of picking them. What happens to the equilibrium price and quantity of blueberries?
Show the solutionHide the solution
- Step 1: The study raises tastes for blueberries, so demand increases (D shifts right). Alone, that raises both price and quantity.
- Step 2: The machine is better technology, so supply increases (S shifts right). Alone, that lowers price and raises quantity.
- Step 3: Quantity: both shifts raise it, so equilibrium quantity rises for sure.
- Step 4: Price: one shift pushes it up and the other down. Without knowing which shift is bigger, price is indeterminate.
- Step 5: The trap is to draw two shifts of the same size and report that price "stays the same." Unless the question gives sizes, say the change is indeterminate.
Answer: Equilibrium quantity increases; the change in equilibrium price is indeterminate.
Common mistakes
- Explaining a shift with a chain like "price rises, so demand falls, so price falls." A price change moves along a curve; it doesn't shift one.
- Reading a surplus as "quantity demanded minus quantity supplied." At a price above equilibrium, it's quantity supplied minus quantity demanded.
- Giving a definite answer for both price and quantity when both curves shift. One of them is always indeterminate unless sizes are given.
- Mixing up which side of equilibrium causes what: prices above equilibrium create surpluses, prices below create shortages.
On the exam
- Expect multiple-choice questions with a shift (or two) and four or five combinations of "price rises/falls, quantity rises/falls." Sketch a quick graph in the margin.
- This exact reasoning (shift a curve, read the new price and quantity) is used for the money market, loanable funds and foreign exchange graphs on the free-response section.
Connected topics
Videos
Check yourself
4 questions on 1.6 Market Equilibrium, Disequilibrium, and Changes in Equilibrium. Pick an answer to see if you got it, and why.
| Price per unit ($) | Quantity demanded (units) | Quantity supplied (units) |
|---|---|---|
| 2 | 80 | 20 |
| 4 | 65 | 35 |
| 6 | 50 | 50 |
| 8 | 35 | 65 |
| 10 | 20 | 80 |
Hypothetical market data
What are the equilibrium price and quantity in this market?
If the price were $4, the market would have a
If the price were $10, how large would the surplus be?
On a graph with price on the vertical axis and quantity on the horizontal axis, demand curve D and supply curve S cross at price P1 and quantity Q1. If the price is currently at P2, which is above P1, which of the following will occur?
0 of 4 answered