Market Equilibrium, Disequilibrium, and Changes in Equilibrium — AP Macroeconomics Study Guide

For: AP Macroeconomics candidates sitting AP Macroeconomics.

Covers: Defining market equilibrium, algebraic and graphical calculation of equilibrium price and quantity, disequilibrium (surpluses and shortages), comparative statics for supply and demand shifts, and analysis of simultaneous shifts on equilibrium outcomes.

You should already know: The law of demand and how to interpret a linear demand curve. The law of supply and how to interpret a linear supply curve. How to solve systems of linear equations.

A note on the practice questions: All worked questions in the "Practice Questions" section below are original problems written by us in the AP Macroeconomics style for educational use. They are not reproductions of past College Board / Cambridge / IB papers and may differ in wording, numerical values, or context. Use them to practise the technique; cross-check with official mark schemes for grading conventions.

1. What Is Market Equilibrium, Disequilibrium, and Changes in Equilibrium?

Market equilibrium is a core foundational concept in all of economics, defined as the market state where the quantity of a good demanded by consumers exactly equals the quantity supplied by producers. At equilibrium, there is no inherent pressure for price or output to change, because both buyers and sellers are satisfied with the market outcome at the prevailing price. Graphically, equilibrium occurs at the intersection of the downward-sloping demand curve and upward-sloping supply curve, with coordinates for equilibrium price ($P_e$) and equilibrium quantity ($Q_e$). Disequilibrium describes any market state where quantity demanded does not equal quantity supplied, resulting in either a shortage (excess demand) or surplus (excess supply), which automatically pushes price toward equilibrium through the actions of buyers and sellers. Changes in equilibrium occur when a non-price determinant of supply or demand shifts the entire curve, leading to a new equilibrium with different $P_e$ and $Q_e$. Per the AP Macroeconomics CED, this topic is part of Unit 1 (Basic Economic Concepts), which accounts for 12-15% of total exam score, and this subtopic appears in both multiple-choice (MCQ) and free-response (FRQ) sections, often as a building block for later policy questions.

2. Calculating Equilibrium Price and Quantity

The first core skill tested on the AP exam is calculating equilibrium price ($P_e$) and equilibrium quantity ($Q_e$) using both graphical and algebraic methods. Graphically, you simply plot the downward-sloping demand curve and upward-sloping supply curve on a graph with price on the vertical axis and quantity on the horizontal axis; the intersection point gives you $P_e$ as the y-coordinate and $Q_e$ as the x-coordinate. For algebraic problems, which are common in FRQ opening parts, you start with the fundamental equilibrium condition: quantity demanded equals quantity supplied. $$Q_d=Q_s$$ For linear demand and supply functions, the most common form on the AP exam, this is straightforward to solve. Standard linear demand is written as $Q_d=a-bP$, where $a$ is the quantity demanded when price is 0, and $b$ is a positive slope coefficient (the negative sign reflects the law of demand). Standard linear supply is written as $Q_s=c+dP$, where $d$ is the positive slope coefficient reflecting the law of supply. To solve, substitute the two functions into the equilibrium condition, rearrange to solve for $P_e$, then plug $P_e$ back into either function to get $Q_e$. Always check by plugging into the other function to confirm you get the same quantity.

Worked Example

Given the demand for artisanal iced coffee is $Q_d=200-15P$ and supply is $Q_s=50+10P$, where $Q$ is cups per week and $P$ is price per cup in dollars. Find equilibrium price and equilibrium quantity.

1. Write the equilibrium condition: set quantity demanded equal to quantity supplied, $Q_d=Q_s$.
2. Substitute the given functions into the condition: $200-15P_e=50+10P_e$.
3. Rearrange terms to isolate $P_e$: $200-50=15P_e+10P_e\to 150=25P_e\to P_e=6$.
4. Plug $P_e=6$ back into the demand function to find $Q_e$: $Q_e=200-15(6)=200-90=110$ cups per week.
5. Confirm with the supply function to check for algebra errors: $Q_e=50+10(6)=50+60=110$, which matches.

Exam tip: Always plug your calculated equilibrium price back into both supply and demand to confirm your quantity matches; a common algebra mistake is flipping signs when rearranging terms, and this check will catch 90% of errors before you move on.

3. Disequilibrium: Surpluses and Shortages

Disequilibrium occurs whenever the actual market price is not equal to the equilibrium price, so $Q_d\ne Q_s$. There are two distinct types of disequilibrium, each creating automatic pressure for price to adjust back to equilibrium:

1. Shortage (excess demand): Occurs when the actual market price $P<P_e$, so $Q_d>Q_s$. More buyers want to purchase the good than sellers are willing to supply at the low price, so unsatisfied buyers bid up the price, and sellers raise prices to capture more revenue. This pushes price upward toward $P_e$.
2. Surplus (excess supply): Occurs when the actual market price $P>P_e$, so $Q_s>Q_d$. Sellers are left with unsold inventory, so they cut prices to clear excess stock, pushing price downward toward $P_e$. The size of a disequilibrium is the absolute difference between quantity demanded and quantity supplied at the given market price, which is always a positive value.

Worked Example

Using the same iced coffee market from the previous example ($Q_d=200-15P$, $Q_s=50+10P$, $P_e=6$), if local cafes set a price of $8 per cup, identify if the market is in equilibrium, surplus, or shortage, and calculate the size of the disequilibrium.

1. Compare the actual price to equilibrium: $P=8>P_e=6$, so this is consistent with a surplus.
2. Calculate quantity demanded at $P=8$: $Q_d=200-15(8)=200-120=80$ cups per week.
3. Calculate quantity supplied at $P=8$: $Q_s=50+10(8)=50+80=130$ cups per week.
4. Calculate the size of the surplus: $\text{Surplus}=Q_s-Q_d=130-80=50$ cups per week.
5. Explain the adjustment: Sellers will cut prices to clear unsold iced coffee, pushing price back down to $6 per cup until the surplus is eliminated.

Exam tip: On FRQ, always explicitly explain how price adjustment eliminates a surplus or shortage; AP graders require you to connect the disequilibrium to the direction of price change, not just state what the disequilibrium is.

4. Comparative Statics: Single Shifts in Supply or Demand

Comparative statics is the process of comparing the original equilibrium to the new equilibrium after a shift in supply, demand, or both. When only one curve shifts (the other remains constant), you can always predict the direction of change for both equilibrium price and quantity, with no ambiguity. The simple "four for four" rule for single shifts is:

• Increase in demand (demand shifts right): $P_e$ ↑, $Q_e$ ↑
• Decrease in demand (demand shifts left): $P_e$ ↓, $Q_e$ ↓
• Increase in supply (supply shifts right): $P_e$ ↓, $Q_e$ ↑
• Decrease in supply (supply shifts left): $P_e$ ↑, $Q_e$ ↓ For graphical analysis, you just shift the appropriate curve, find the new intersection, and compare outcomes to the original equilibrium.

Worked Example

The market for electric bicycles has original supply $Q_s=5000+5P$ and demand $Q_d=20000-10P$, where $Q$ is bikes per year and $P$ is price per bike in dollars. A major improvement in battery technology reduces production costs, shifting supply to $Q_s^{\prime }=8000+5P$, with no change to demand. What is the effect on equilibrium price and quantity?

1. Identify the shift: Lower production costs are a non-price determinant that increases supply, so supply shifts right, demand remains unchanged.
2. Apply the equilibrium condition to the new supply: $Q_d=Q_s^{\prime }\to 20000-10P_e^{\prime }=8000+5P_e^{\prime }$.
3. Solve for the new equilibrium: $12000=15P_e^{\prime }\to P_e^{\prime }=\$800$ per bike.
4. Calculate new equilibrium quantity: $Q_e^{\prime }=20000-10(800)=12000$ bikes per year.
5. Compare to original equilibrium ($P_e=\$1000$, $Q_e=10000$): Equilibrium price decreases by $\$200$, and equilibrium quantity increases by 2000 bikes, matching the single shift rule.

Exam tip: On FRQ that require drawing a shifted curve, always label your original curves $S_1/D_1$ and new curves $S_2/D_2$, and label original and new equilibrium points $E_1$ and $E_2$; AP graders take points off for unlabeled graphs.

5. Comparative Statics: Simultaneous Shifts in Both Curves

When both supply and demand shift at the same time, only one outcome (either $P_e$ or $Q_e$) has a predictable direction; the other is ambiguous, meaning you cannot predict its change without knowing the relative magnitude of the two shifts. The rule for simultaneous shifts is:

• Both demand and supply shift right: $Q_e$ ↑, $P_e$ ambiguous
• Demand shifts right, supply shifts left: $P_e$ ↑, $Q_e$ ambiguous
• Both demand and supply shift left: $Q_e$ ↓, $P_e$ ambiguous
• Demand shifts left, supply shifts right: $P_e$ ↓, $Q_e$ ambiguous This works because the outcome that moves in the same direction from both shifts is definite, while the outcome that moves opposite directions from each shift depends on how big each shift is.

Worked Example

A new public health study finds that regular oat milk consumption reduces the risk of heart disease, increasing consumer preference for oat milk. At the same time, drought destroys a large share of the North American oat crop, increasing the cost of producing oat milk. What is the effect on equilibrium price and quantity in the oat milk market?

1. Identify shifts: Higher consumer preference increases demand (shifts demand right), higher input costs decrease supply (shifts supply left).
2. Check direction of change for each outcome: A right demand shift pushes $P_e$ up and $Q_e$ up; a left supply shift pushes $P_e$ up and $Q_e$ down.
3. $P_e$ moves in the same direction (up) from both shifts, so $P_e$ is definitely predicted to increase. $Q_e$ moves up from demand and down from supply, so the net change in $Q_e$ depends on the size of each shift.
4. Conclusion: Equilibrium price will definitely increase; the change in equilibrium quantity is ambiguous, and cannot be determined without additional information on the magnitude of the two shifts.

Exam tip: On MCQ questions about double shifts, any answer that claims both price and quantity have a definite change is almost always wrong; eliminate it immediately unless you are given explicit information about the size of each shift.

6. Common Pitfalls (and how to avoid them)

• Wrong move: Shifting the entire demand curve when the only change is a change in the price of the good itself. Why: Students confuse a movement along the curve (change in quantity demanded/supplied) with a shift of the entire curve (change in demand/supply). Correct move: Always ask: Is this change caused by the price of this good? If yes, it is a movement along the curve; if it is any other factor, it is a shift of the entire curve.
• Wrong move: Reporting the size of a surplus or shortage as a negative number. Why: Students subtract the larger quantity from the smaller, leading to a negative value. Correct move: Always calculate surplus as $Q_s-Q_d$ and shortage as $Q_d-Q_s$, so the result is always positive, since disequilibrium size is a measure of excess quantity.
• Wrong move: Predicting both price and quantity for a simultaneous double shift without being given the size of each shift. Why: Students memorize single shift rules and apply them incorrectly to double shifts. Correct move: For double shifts, check if the change in P is in the same direction from both shifts (then P is definite, Q ambiguous) before answering.
• Wrong move: Solving for equilibrium by setting $P_d=P_s$ instead of $Q_d=Q_s$ for functions written as Q in terms of P. Why: Students mix up standard (Q as a function of P) and inverse (P as a function of Q) forms. Correct move: Always write the equilibrium condition as $Q_d=Q_s$ when your functions are written with Q as the dependent variable.
• Wrong move: Claiming that a shortage means no goods are available for sale, or a surplus means no goods are sold. Why: Students confuse disequilibrium with zero quantity traded. Correct move: In disequilibrium, the quantity traded is always the smaller of Qd and Qs; there are just more or fewer goods desired than are available at the current price.
• Wrong move: Drawing a new equilibrium after a left shift in demand with a higher equilibrium quantity than the original. Why: Students confuse left and right directions on the quantity axis. Correct move: Remember that right on the x-axis means higher quantity, so a right shift means higher equilibrium quantity, and a left shift means lower equilibrium quantity.

7. Practice Questions (AP Macroeconomics Style)

Question 1 (Multiple Choice)

The market for holiday turkeys has an original equilibrium at $P_e=\$20$, $Q_e=1,000,000$ turkeys. Demand for turkeys increases in November, and at the same time, turkey farmers increase the number of turkeys they bring to market (supply increases). What is the effect on equilibrium price and quantity? A) Equilibrium price increases, equilibrium quantity decreases B) Equilibrium price decreases, equilibrium quantity increases C) Equilibrium quantity increases, change in equilibrium price is ambiguous D) Equilibrium price increases, change in equilibrium quantity is ambiguous

Worked Solution: First, identify the direction of each shift: demand increases (shifts right), supply increases (shifts right). A right shift in demand pushes both price and quantity up, while a right shift in supply pushes price down and quantity up. Quantity increases from both shifts, so the change in quantity is definitely positive. Price is pushed up by the demand shift and down by the supply shift, so the change in price depends on the magnitude of each shift, making it ambiguous. This matches option C. The correct answer is C.

Question 2 (Free Response)

Suppose the market for iced matcha lattes in a city is described by the following functions, where $P$ is the price per latte in dollars, and $Q$ is the number of lattes sold per day: Demand: $Q_d=300-20P$ Supply: $Q_s=-60+40P$

(a) Calculate the equilibrium price and equilibrium quantity of iced matcha lattes. Show your work. (b) If a local coffee association convinces the city to set a price floor of $\$5$ per latte. Is there a shortage, surplus, or neither? Calculate the size of the disequilibrium, if any. (c) Suppose consumer income increases, and iced matcha lattes are a normal good. How does this shift the demand curve? What is the effect on equilibrium price and quantity? Explain.

Worked Solution: (a) Start with the equilibrium condition $Q_d=Q_s$: $$300-20P_e=-60+40P_e$$ Rearrange: $360=60P_e\to P_e=\$6$ per latte. Substitute back to find $Q_e$: $Q_e=300-20(6)=180$ lattes per day. Checking with supply confirms $Q_e=-60+40(6)=180$, so this is correct.

(b) The price floor of $\$5$ is below the equilibrium price of $\$6$. Calculate $Q_d$ and $Q_s$ at $P=5$: $Q_d=300-20(5)=200$, $Q_s=-60+40(5)=140$. Since $Q_d>Q_s$, there is a shortage of $200-140=60$ lattes per day.

(c) For a normal good, an increase in consumer income increases demand at every price, so the entire demand curve shifts right. With an unchanged supply curve, a right shift in demand leads to an increase in both equilibrium price and equilibrium quantity, per the single shift rule.

Question 3 (Application / Real-World Style)

In 2022, the global market for liquefied natural gas (LNG) faced two changes: 1) European countries increased their demand for LNG to replace Russian pipeline gas, and 2) U.S. LNG export facilities expanded their production capacity. The original equilibrium was $P_e=\$12$ per million British thermal units (MMBtu), $Q_e=100$ million MMBtu per month. After the shifts, the new equilibrium quantity is 130 million MMBtu per month. Is the change in equilibrium price predictable? Explain what we know for sure, and what additional information is needed to predict the change in price.

Worked Solution: The two shifts are a right shift in demand (higher European demand) and a right shift in supply (expanded U.S. production capacity). For two simultaneous right shifts, equilibrium quantity definitely increases, which matches the observed change from 100 to 130 million MMBtu. The change in equilibrium price is ambiguous: the right demand shift pushes price up, while the right supply shift pushes price down. To predict the change in price, we need to know the relative magnitude of the two shifts: if demand shifted more than supply, price will rise; if supply shifted more than demand, price will fall. Without this information, we cannot determine the net change in equilibrium price.

8. Quick Reference Cheatsheet

9. What's Next

This chapter provides the core supply and demand equilibrium framework that you will use across the entire AP Macroeconomics course. Every topic from price controls and international trade to the aggregate demand-aggregate supply model, fiscal policy, and monetary policy builds directly on the ability to find equilibrium, identify disequilibrium, and predict the effect of shifts on price and quantity. Without mastering the comparative statics rules and equilibrium condition in this chapter, you will not be able to correctly analyze macroeconomic outcomes like inflation, unemployment, and output growth. Next, you will apply the core equilibrium concepts from this chapter to government price interventions that create persistent disequilibrium in markets.

• Price Controls
• Comparative Advantage and Gains from Trade
• Aggregate Demand-Aggregate Supply Model
• Economic Growth