Question

What is market disequilibrium explain with example

Answer 1

Explanation:

Disequilibrium

Disequilibrium occurs when the markets fail to clear and find their final equilibrium point. Disequilibrium could occur if the price was below the market equilibrium price causing demand to be greater than supply, and therefore causing a shortage. Disequilibrium can occur due to factors such as government controls, non-profit maximising decisions and ‘sticky’ prices.

Disequilibrium due to price below equilibrium

 

With a price of P1, the demand (Q1) is greater than the supply (Q3). This disequilibrium will lead to a shortage (Q1-Q3)  and long queues as consumers try to get the limited supply. In a free market, you would expect firms to deal with this disequilibrium by putting up the price to ration the demand.

Example of disequilibrium – football

A good example could be tickets for a football stadium. With a strictly limited supply (55,000). Demand for big games may far exceed supply. The market equilibrium price would be £77. But, the football club may decide to set prices at £40. This causes 10,000 to be unable to go to the game at that price.

Football clubs are likely to avoid setting a market clearing price (£77) because they don’t want to be accused of being ‘elitist and unfair’. It is important for clubs to create good relations with the local community. Also, with sport, the profit motive is not the only factor behind the business.

Therefore, they may keep prices well below the market clearing price (£40). (where demand is greater than supply) The problem is that many fans who want to watch the game can’t get in. It may lead to a black market where some resell tickets to those willing to pay a much higher price.

There could be a disequilibrium through a maximum price. – which is a government control to set prices below the equilibrium. (e.g. renting)

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