Disequilibrium (Economics) - Explained
What is Disequilibrium?
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What is Disequilibrium?
Disequilibrium is when the market fails to find an equilibrium point - which is the state of a market when there are no shortages or surpluses of supply and demand at a market-clearing price (this is also referred to as equilibrium price).
Back to: ECONOMIC ANALYSIS & MONETARY POLICY
How does Disequilibrium Occur?
In a free market, the price of goods and services will generally increase as the supply of goods decrease. Likewise, the price of goods will decrease as the supply of goods or services increase. Market disequilibrium is an imbalance between supply and demand - such that supply exceeds the level of demand or demand exceeds the available supply. Types of disequilibrium are labor market disequilibrium and balance of payments disequilibrium.
Types of Disequilibrium?
Famed economist, John Maynard Keynes, was the first to study market disequilibrium. He theorized that markets will usually be in a state of disequilibrium as a result of various factors that influence market stability. Below are the major reasons for disequilibrium in a market:
- Government Controls: The government may set the lowest or highest price for a market. Disequilibrium will occur when the demand exceeds the supply
- Sticky Prices: this occurs when a firm or a supplier fixes a certain price for a particular period of time and this is stuck to despite an increase in demand. This will subsequently lead to a shortage of supply.
- Labor Market Disequilibrium: this occurs when the supply of labor exceeds the demand. This is normally due to the minimum wage set by the government.
Balance of Payments Disequilibrium: Balance of payment is a record of all economic transactions during a specific period. An imbalance between exports and imports, recession or depression, political instability and an increase in growth of a poor country can cause disequilibrium in the balance of payments
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- Diminishing Marginal Utility
- Sunk Costs
- Production Possibilities Frontier
- Law of Diminishing Returns
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- Efficiency Theory
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- Capacity Utilization Rate
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- Invisible Hand
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