# Market Equilibrium, Disequilibrium, and Changes in Equilibrium

> AP Microeconomics · Unit 2: Supply and Demand
> Source: https://www.owlsprep.com/study/ap-microeconomics-u2-market-equilibrium-disequilibrium-and-changes/

This module covers core concepts of competitive market equilibrium, disequilibrium (surpluses and shortages), and equilibrium changes after supply/demand shifts. You will learn algebraic calculation and comparative statics for AP Microeconomics exam questions.

**Prerequisites:** [Law of demand and non-price determinants of demand](https://www.owlsprep.com/study/ap-microeconomics-u2-demand/); [Law of supply and non-price determinants of supply](https://www.owlsprep.com/study/ap-microeconomics-u2-supply/); Interpreting linear supply and demand functions

## Learning objectives

- Define market equilibrium and disequilibrium
- Calculate equilibrium price and quantity algebraically
- Calculate the size of surpluses and shortages
- Predict changes in equilibrium after single and simultaneous shifts of supply and demand
- Avoid common exam pitfalls related to equilibrium analysis

## Core Concepts of Equilibrium and Disequilibrium

Market equilibrium is the unique price-quantity combination where quantity demanded exactly equals quantity supplied ($Q_d = Q_s$). At equilibrium, there is no inherent pressure for price or quantity to change, because consumers can buy all they want and producers can sell all they want at the equilibrium price.

**Market Equilibrium** — A market outcome where quantity demanded equals quantity supplied, with no pressure for price or quantity to change

*Example:* At $P_e = \$18$, 64 loaves of sourdough are demanded and supplied

Disequilibrium describes any market outcome where $Q_d \neq Q_s$, resulting in either a shortage or a surplus. When non-price determinants of supply or demand change, the market adjusts to a new equilibrium; comparative statics is the method of comparing the original and new equilibrium to predict changes in price and quantity. This topic is heavily tested on the AP Micro exam, appearing in both multiple choice and free response questions.

> **Exam tip:** Always use correct terminology: 'change in demand/supply' refers to a shift of the entire curve, while 'change in quantity demanded/supplied' refers to movement along an existing curve.

## Calculating Market Equilibrium Algebraically

For most AP Microeconomics questions, you will work with linear direct demand and supply functions, written as:

$$Q_d = a - bP \\ Q_s = c + dP$$

Where $Q_d$ = quantity demanded, $Q_s$ = quantity supplied, $P$ = price of the good, and $a, b, c, d$ are constants. To find equilibrium, follow these steps: 1. Set $Q_d = Q_s$ (the core equilibrium condition), 2. Solve for equilibrium price $P_e$, 3. Substitute $P_e$ back into either function to get equilibrium quantity $Q_e$, 4. Verify by plugging $P_e$ into both functions to confirm you get the same $Q_e$, which catches common algebra errors.

**Worked example:** Suppose the weekly demand for homemade sourdough loaves in a neighborhood is given by $Q_d = 100 - 2P$, where $Q_d$ is loaves per week and $P$ is price per loaf in dollars. Supply is given by $Q_s = 10 + 3P$. Calculate the equilibrium price and quantity.

1. Apply the equilibrium condition $Q_d = Q_s$, substitute the given functions:

   $$100 - 2P = 10 + 3P$$
2. Rearrange terms to isolate $P$:

   $$100 - 10 = 3P + 2P \implies 90 = 5P$$
3. $P_e = 90/5 = \$18$
4. $Q_e = 100 - 2(18) = 64$ loaves
5. $Q_s = 10 + 3(18) = 64$, which matches, so the solution is correct.

> **Exam tip:** If you are given inverse functions (with $P$ as a function of $Q$), always rearrange to get $Q_d$ and $Q_s$ before setting them equal. Do not set inverse functions equal directly, this will give the wrong equilibrium.

## Disequilibrium: Surpluses and Shortages

Disequilibrium occurs at any price that is not equal to $P_e$, so $Q_d \neq Q_s$. There are two types of disequilibrium:

- **Shortage (excess demand):** Occurs when $P < P_e$, so $Q_d > Q_s$. Competition between consumers pushes prices up toward equilibrium.
- **Surplus (excess supply):** Occurs when $P > P_e$, so $Q_s > Q_d$. Producers cut prices to clear inventory, pushing prices down toward equilibrium.

In unregulated competitive markets, disequilibrium is temporary; persistent disequilibrium only occurs with external constraints like government price controls.

**Worked example:** Using the sourdough market from the previous example ($Q_d = 100 - 2P$, $Q_s = 10 + 3P$, $P_e = \$18$, $Q_e = 64$), the neighborhood association imposes a price cap of $\$10$ per loaf. Is there a shortage or surplus, and what is its size?

1. Plug the imposed price $P = \$10$ into both demand and supply functions.
2. Calculate quantity demanded and supplied: $Q_d = 100 - 2(10) = 80$ loaves, $Q_s = 10 + 3(10) = 40$ loaves.
3. Compare quantities: $Q_d (80) > Q_s (40)$, so this is a shortage.
4. Calculate the size of the shortage: $\text{Shortage} = Q_d - Q_s = 80 - 40 = 40$ loaves per week.

> **Exam tip:** On FRQs, always report the size of disequilibrium as a positive number: shortage = $Q_d - Q_s$, surplus = $Q_s - Q_d$.

## Changes in Equilibrium: Single Shifts

When a non-price determinant of supply or demand changes, the entire curve shifts, leading to a new equilibrium. Comparative statics compares the original and new equilibrium to predict changes in $P_e$ and $Q_e$. For single shifts (only supply or only demand shifts), the direction of change is always predictable:

- Rightward demand shift (demand increase): $P_e$ ↑, $Q_e$ ↑
- Leftward demand shift (demand decrease): $P_e$ ↓, $Q_e$ ↓
- Rightward supply shift (supply increase): $P_e$ ↓, $Q_e$ ↑
- Leftward supply shift (supply decrease): $P_e$ ↑, $Q_e$ ↓

To adjust a linear function for a shift: add the size of the shift to the intercept term for a right shift (increase in quantity at every price), subtract for a left shift (decrease in quantity at every price).

**Worked example:** Original sourdough market: $Q_d = 100 - 2P$, $Q_s = 10 + 3P$, original $P_e = \$18$, $Q_e = 64$. A viral social media post increases demand by 20 loaves at every price. Find the new equilibrium price and quantity.

1. Adjust the demand function for the 20-unit right shift: New $Q_d' = 100 + 20 - 2P = 120 - 2P$. Supply does not change.
2. Set $Q_d' = Q_s$:

   $$120 - 2P = 10 + 3P$$
3. Solve for new equilibrium price:

   $$110 = 5P \implies P_e' = \$22$$
4. Solve for new equilibrium quantity: $Q_e' = 120 - 2(22) = 76$ loaves. Verify with supply: $10 + 3(22) = 76$, which is correct.
5. The new equilibrium has higher price and higher quantity, matching the prediction for a rightward demand shift.

> **Exam tip:** AP graders penalize mixing up 'shift of the curve' vs 'movement along the curve'. Always use the correct terminology for shifts vs movements.

## Simultaneous Shifts of Supply and Demand

When both supply and demand shift at the same time, one equilibrium outcome (either $P_e$ or $Q_e$) will always be ambiguous unless you know the relative size of the shifts. The core rule is: if both shifts push an outcome in the same direction, the change is definite; if shifts push in opposite directions, the change is ambiguous.

- Demand increase (right) + supply decrease (left): $P_e$ definitely increases, $Q_e$ is ambiguous
- Demand increase (right) + supply increase (right): $Q_e$ definitely increases, $P_e$ is ambiguous
- Demand decrease (left) + supply increase (right): $P_e$ definitely decreases, $Q_e$ is ambiguous
- Demand decrease (left) + supply decrease (left): $Q_e$ definitely decreases, $P_e$ is ambiguous

**Worked example:** Original sourdough market: $Q_d = 100 - 2P$, $Q_s = 10 + 3P$. Two changes occur: (1) a viral post increases demand by 20 loaves at every price, (2) a wheat shortage decreases supply by 30 loaves at every price. What is the definite vs ambiguous outcome, and what is the new equilibrium?

1. Adjust the functions for both shifts: New $Q_d' = 120 - 2P$, new $Q_s' = 10 - 30 + 3P = -20 + 3P$.
2. Apply the simultaneous shifts rule: Demand increase pushes $P_e$ up, supply decrease pushes $P_e$ up, so $P_e$ is definitely increased. Demand pushes $Q_e$ up, supply pushes $Q_e$ down, so $Q_e$ is ambiguous.
3. Set $Q_d' = Q_s'$ to solve for new equilibrium:

   $$120 - 2P = -20 + 3P \implies 140 = 5P \implies P_e' = \$28$$
4. Calculate new equilibrium quantity: $Q_e' = 120 - 2(28) = 64$ loaves. In this specific case, $Q_e$ is unchanged, but that outcome depends on the relative size of the shifts.

**Check your understanding**

Test your understanding:

1. The market for trail mix has $Q_d = 120 - 4P$, $Q_s = -30 + 6P$. A harmful additive report reduces demand by 10 units at every price. What is the new equilibrium price?

   - \$13
   - \$14
   - \$15
   - \$16

   *Answer:* \$14

   *Why:* Correct: Adjust demand to $110 - 4P$, set equal to supply to get $P = 14$. The most common error is forgetting to shift demand, which gives \$15.

> **Exam tip:** On MCQs asking for the effect of simultaneous shifts, you can immediately eliminate any option that claims both $P_e$ and $Q_e$ have definite changes, which is impossible.

## Common pitfalls

- **Wrong:** Writing 'higher input costs reduce demand for lattes' when the supply curve shifts left
  - Why it fails: Students mix up terminology because both changes alter equilibrium quantity, leading to mislabeling the shifted curve
  - Correct: Always ask: did the change affect producer costs (supply shift) or consumer willingness to buy (demand shift) before labeling the shift
- **Wrong:** Shifting supply right when input costs increase
  - Why it fails: Students confuse 'increase in supply' (more output at every price) with the effect of higher costs
  - Correct: Before drawing, ask: does this change lead to more output at every price (right shift) or less output at every price (left shift)
- **Wrong:** Claiming both $P_e$ and $Q_e$ are definitely changed when both supply and demand shift
  - Why it fails: Students forget that opposite pushes on one outcome leave it ambiguous without shift magnitudes
  - Correct: Always check the direction each shift pushes each outcome, and label ambiguous outcomes if pushes are opposite
- **Wrong:** Calculating shortage size as $Q_s - Q_d$, leading to a negative number
  - Why it fails: Students mix up which quantity is larger for each type of disequilibrium
  - Correct: Memorize: shortage = $Q_d - Q_s$, surplus = $Q_s - Q_d$, so size is always positive
- **Wrong:** Forgetting to check $Q_e$ in both functions after solving for equilibrium, leaving algebra errors uncaught
  - Why it fails: Students rush through calculation questions on the exam
  - Correct: Always plug $P_e$ into both $Q_d$ and $Q_s$ to confirm you get the same $Q_e$ before moving on
- **Wrong:** Setting inverse demand and inverse supply equal to each other directly to find equilibrium
  - Why it fails: Students confuse direct and inverse function forms, violating the equilibrium condition
  - Correct: The equilibrium condition is always quantity demanded equals quantity supplied, so always rearrange functions to get $Q_d$ and $Q_s$ before setting them equal

## Cheatsheet

| Category | Formula / Rule | Notes |
| --- | --- | --- |
| Core Equilibrium Condition | $Q_d = Q_s$ | Always holds at competitive market equilibrium |
| Shortage Size | $\text{Shortage} = Q_d - Q_s$ | Occurs when $P < P_e$; always positive |
| Surplus Size | $\text{Surplus} = Q_s - Q_d$ | Occurs when $P > P_e$; always positive |
| Horizontal Demand Shift | $Q_d' = Q_d + k$ (increase) / $Q_d' = Q_d - k$ (decrease) | $k$ = change in quantity at every price; +k shifts right |
| Horizontal Supply Shift | $Q_s' = Q_s + k$ (increase) / $Q_s' = Q_s - k$ (decrease) | $k$ = change in quantity at every price; -k shifts left |
| Single Demand Shift Prediction | Right: $P_e$ ↑, $Q_e$ ↑; Left: $P_e$ ↓, $Q_e$ ↓ | Applies when only demand shifts |
| Single Supply Shift Prediction | Right: $P_e$ ↓, $Q_e$ ↑; Left: $P_e$ ↑, $Q_e$ ↓ | Applies when only supply shifts |
| Simultaneous Shifts Rule | Same direction = definite change; opposite = ambiguous change | One outcome is always ambiguous without shift magnitudes |

## What's next

Mastering market equilibrium is the foundation for almost all subsequent topics in AP Microeconomics, from consumer and producer surplus to price controls, market efficiency, and market failures. These topics make up a large share of the AP exam score, and the comparative statics skills you learned here will be used repeatedly to analyze policy interventions and market outcomes. It is critical to be comfortable with both algebraic calculation and graphical analysis of equilibrium shifts, as these questions appear on almost every free response question. Building fluency with these concepts now will make more advanced topics much easier to master.

- [Unit 2: Supply and Demand Overview](https://www.owlsprep.com/study/ap-microeconomics-u2-overview/)
- [Consumer and Producer Surplus](https://www.owlsprep.com/study/ap-microeconomics-u2-consumer-and-producer-surplus/)
- [Government Intervention: Price Controls and Taxes](https://www.owlsprep.com/study/ap-microeconomics-u2-government-intervention-price-controls-and/)

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