Answer to Question #130733 in Economics of Enterprise for Tom

Question

Show in a diagram what would be a disequilibrium situation in a perfectly

competitive market

Answer 1

In a perfectly competitive market, certain forces leads to change in price of a service or item. In such a case there is an imbalance between the quantity supplied and the quantity demanded,hence the market for the product is referred to be in disequilibrium.

In the diagram, when price rises to P2, the sellers will be willing to supply more commodities from their storage facilities because the rise in price will lead to higher profits. However the, buyers will reduce the quantity they are willing to buy due to the higher prices. When such an imbalance occurs, the quantity demanded will be lower than the quantity supplied, hence surplus will exist leading to a disequilibrium market.