Equilibrium, Shortages, and Surpluses

The price at which quantity demanded equals quantity supplied is the equilibrium price; the traded amount is the equilibrium quantity. Equilibrium does not mean fairest or permanent. It means current conditions create no shortage or surplus pushing price further.

Away from equilibrium

Below equilibrium, quantity demanded exceeds quantity supplied. Shortages, queues, and stockouts create upward price pressure. Above equilibrium, quantity supplied exceeds quantity demanded. Inventories and seller competition create downward pressure.

Solve equilibrium algebraically

Suppose $Q_d=90-5P$ and $Q_s=10+5P$. Set $Q_d=Q_s$: $90-5P=10+5P$, so $P^*=8$ and substitution gives $Q^*=50$. The star denotes an equilibrium value.

At $P=6$, demand is 60 and supply 40, a shortage of 20. Actual trade cannot exceed the short side, 40. At $P=10$, demand is 40 and supply 60, a surplus of 20; trade is again at most 40.

Equilibrium is not inactivity: transactions continue, but there is no systematic net pressure. Contracts, search costs, controls, inventories, and quality changes can slow or redirect adjustment.

Adjustment takes time and may be slowed by contracts, menu costs, or price controls. A shortage is a quantity gap at a price, not scarcity. Resources remain scarce even when a market clears.