AP® Microeconomics review sheet from Aim for Five (aimforfive.com/micro/units/2/2-7)
Unit 2 · Topic 2.7
2.7 Market Disequilibrium and Changes in Equilibrium
When the price isn't at equilibrium, the market has a surplus or a shortage, and the price tends to move back toward equilibrium. When supply or demand shifts, the market moves to a new equilibrium. If both shift at once, you can predict only one of price or quantity unless you know how big each shift is.
Key terms
- surplus
- shortage
- disequilibrium
- shift in demand
- shift in supply
- indeterminate change
Surpluses and shortages
If the price is above equilibrium, quantity supplied is greater than quantity demanded. The gap is a surplus (excess supply). Sellers have unsold goods, so they cut prices, which raises quantity demanded and lowers quantity supplied until the surplus disappears.
If the price is below equilibrium, quantity demanded is greater than quantity supplied. The gap is a shortage (excess demand). Buyers compete for limited goods, so the price rises until the shortage disappears.
The size of a surplus or shortage is measured horizontally on the graph: the distance between the quantity on the supply curve and the quantity on the demand curve at that price. Don't confuse a market surplus (unsold goods) with consumer or producer surplus (gains from trade); they're different ideas that share a word.
One curve shifts
The process: at the old price, the shift creates a shortage or surplus, and the price moves until the market clears again. For example, if demand increases, there's a shortage at the old price, so the price rises, and sellers move up along the supply curve to a higher quantity supplied.
Shifts also change surplus. When demand increases, the price and quantity both rise along an unchanged supply curve, so producer surplus grows. When supply increases, the price falls and quantity rises along an unchanged demand curve, so consumer surplus grows. A decrease in demand shrinks producer surplus, and a decrease in supply shrinks consumer surplus. The other side's change depends on the exact curves, so calculate the triangles before and after when you're given numbers. Elasticity decides how a shift splits between price and quantity: the steeper the curve that stays put, the more the price moves and the less the quantity does.
| Change | Equilibrium price | Equilibrium quantity |
|---|---|---|
| Demand increases (right) | Rises | Rises |
| Demand decreases (left) | Falls | Falls |
| Supply increases (right) | Falls | Rises |
| Supply decreases (left) | Rises | Falls |
Describing a shift on a graph
Because you'll describe graphs in words, practice the full description. For an increase in demand: price is on the vertical axis and quantity on the horizontal axis; the original demand curve D₁ crosses the upward-sloping supply curve S at the original price P₁ and quantity Q₁; the new demand curve D₂ sits to the right of D₁; D₂ crosses S at a higher price P₂ and a larger quantity Q₂. Every label (axes, curves, both equilibrium points) earns credit on a free-response graph, so don't skip any of them.
Both curves shift
When both curves shift, figure out the effect of each shift on price and quantity separately. Where the effects agree, you know the answer. Where they conflict, that variable is indeterminate (it could rise, fall or stay the same) unless the question tells you which shift is bigger.
| Demand | Supply | Price | Quantity |
|---|---|---|---|
| Increases | Increases | Indeterminate | Rises |
| Decreases | Decreases | Indeterminate | Falls |
| Increases | Decreases | Rises | Indeterminate |
| Decreases | Increases | Falls | Indeterminate |
Effects on related markets
A change in one market can spill into others. If the price of beef rises because supply fell, demand for chicken (a substitute) increases, raising chicken's price and quantity. Demand for hamburger buns (a complement to beef) decreases. Questions often chain two markets like this, so follow each step: what changed in market 1, what that does to a determinant of market 2, and which curve in market 2 shifts.
Worked examples
Try each one yourself first, then open the solution.
- Example 1Calculator allowed
Measuring a surplus and a shortage
In a market, quantity demanded = 120 − 10P and quantity supplied = 15P − 30, where P is the price in dollars. Equilibrium is at $6 and 60 units. What happens at a price of $8? At $4?
Show the solutionHide the solution
- Step 1: At $8: quantity demanded = 120 − 80 = 40; quantity supplied = 120 − 30 = 90. Supply exceeds demand by 90 − 40 = 50, a surplus of 50 units. The price will tend to fall.
- Step 2: At $4: quantity demanded = 120 − 40 = 80; quantity supplied = 60 − 30 = 30. Demand exceeds supply by 80 − 30 = 50, a shortage of 50 units. The price will tend to rise.
Answer: At $8, a surplus of 50 units; at $4, a shortage of 50 units.
- Example 2
A double shift (classic trap)
In the market for electric bikes, a battery technology breakthrough lowers production costs, and at the same time a popular city program encourages people to bike to work. What happens to equilibrium price and quantity?
Show the solutionHide the solution
- Step 1: Lower costs increase supply (shift right): on its own, price falls and quantity rises.
- Step 2: The program increases demand (shift right): on its own, price rises and quantity rises.
- Step 3: Quantity rises in both cases, so quantity definitely rises.
- Step 4: Price falls from one shift and rises from the other, so without knowing which shift is larger, the change in price is indeterminate. The trap is giving a definite answer for price.
Answer: Equilibrium quantity rises; the change in equilibrium price is indeterminate.
Common mistakes
- Calling a price above equilibrium a shortage. Above equilibrium is a surplus; below is a shortage.
- Shifting supply in response to a demand change. When demand rises, sellers move along their supply curve; supply itself doesn't shift.
- Giving a definite direction for both price and quantity when both curves shift.
- Measuring a shortage or surplus vertically. It's a quantity gap, measured horizontally.
On the exam
- Free-response questions often ask what happens to equilibrium price and quantity after an event, with a correctly labeled graph showing the shift (D₁ to D₂ or S₁ to S₂) and the new equilibrium (P₂, Q₂). State both directions clearly.
- When two curves shift, the answer choices usually include 'cannot be determined' for price or quantity. Work out each shift separately before choosing.
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Check yourself
4 questions on 2.7 Market Disequilibrium and Changes in Equilibrium. Pick an answer to see if you got it, and why.
In the market for electric bikes, demand increases and supply also increases. Which of the following must be true about the new equilibrium?
In a market, demand decreases at the same time as supply increases. Which of the following must be true?
A severe frost destroys a large part of the coffee crop. Assuming nothing else changes, what happens in the market for coffee?
A drought raises the cost of raising cattle. Beef and chicken are substitutes. Which of the following is the most likely effect in the market for chicken?
0 of 4 answered