Cambridge International as and a level Economics Ebook

equilibrium price 
and
 equilibrium 
quantity
. Total consumer expenditure (and therefore total 
revenue) will be $5,600,000 per week. Just think about 
what would happen if for some reason companies thought 
that consumers were prepared to pay $1,600 and supplied 
5,000 units to the market. In this case the market would 
be in 
disequilibrium
(an imbalance where change will 
happen). At a price of $1,600, under present circumstances, 
consumers are only planning to buy 3,000 units. As such 
companies will build up excess stocks at the rate of 2,000 
PCs per week. Th
ere is disequilibrium due to excess 
supply. Companies would be irrational to carry on with 
this unplanned stock building. So how might they react?
Equilibrium price: 
the price where demand and supply are 
equal, where the market clears.
Equilibrium quantity: 
the amount that is traded at the 
equilibrium price.
Disequilibrium: 
a situation where demand and supply are 
not equal.
KEY TERMS
First of all, they could cut prices; they would also probably 
start to reduce the quantity they supply to the market. Of 
course, as they cut prices, some consumers who would 
not have been prepared to pay the higher price are now 
attracted back into the market – the disequilibrium starts to 
narrow. Provided there is no change to any of the conditions 
of supply or demand, and nothing prevented companies 
adjusting in this way, then eventually, the market price and 
quantity should move back to equilibrium.
Equilibrium: 
a situation where there is no tendency for 
change.
KEY TERM
55
Chapter 2: The price system and the microeconomy 

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Th
ink now what would happen if the price was set at 
$1,000. Again we have disequilibrium – this time of excess 
demand. Consumers are now keen to snap up what they 
consider to be a pretty good deal. However, given the low 
prices, supplies are fairly low and there are not enough 
PCs to meet demand – suppliers will run out of stocks far 
quicker than they had expected, so there are unmet orders. 
Profi t-oriented companies, if they are reasonably sharp, 
will recognise this and will start to raise the price and 
increase the number of PCs available for sale. However, 
as prices rise, some consumers will decide that PCs have 
become too expensive and the quantity demanded will fall. 
Once again, the market will adjust back to the equilibrium.
Th
is process of market adjustment may not happen 
instantly; there will be time lags, perhaps quite lengthy 
ones if companies cannot react quickly. Th
e point is that 
there will always be a tendency for the market to move 
back to its equilibrium position because that is where the 
underlying motives and plans of consumers and suppliers 
are driving it. When this position is reached, it is said that 
the market clears.