market equilibrium and disequilibrium

• A market is a place where buyers meet suppliers to exchange goods and services, which can be physical like a market stall or a physical shop, or digital like Amazon or Ebay.
• Equilibrium in a free market represents allocative efficiency because at equilibrium, the resources that firms are using to make goods and services are perfectly following consumer demand.
• Even if the market is not at equilibrium, the free market has special forces that will always return the market back to equilibrium.
• The free market, also known as the price mechanism, has these special functions: allocating scarce resources efficiently, signaling excess demands or excess supplies, incentivizing producers to increase or decrease their output, and rationing scarce resources by encouraging or discouraging consumption.
• Excess demand, also known as a shortage, is not allocative efficiency and is a disequilibrium.
• Disequilibrium can be seen in reality via long queues of people desperate to buy a good or service, or competition between buyers.
• Naturally, prices rise in a situation of excess demand.
• Excess demand can lead to firms reducing their prices, liquidating stocks and making more profit.
• Higher prices signal the need for more resources, incentivizing firms to increase their output.
• Excess demand can lead to existing
• Excess demand means there is upward pressure on prices, with prices rising from P1 to P*.
• Excess demand can lead to firms increasing their prices, making more profit.