Disequilibrium
Candlefocus EditorDisequilibrium is an abnormal state in which supply and demand in a market are mismatched, disrupting the natural equilibrium of the market. This occurs due to external forces such as government intervention, labor market inefficiencies, and unilateral action by a supplier or distributor. Disequilibrium can cause market volatility and fluctuations in prices, with long-term effects on markets that could vary from flash crashes to longer events such as recessions and depressions.
How does Disequilibrium Occur?
Disequilibrium is caused by a range of different external factors. For example, government intervention such as the introduction of taxes or subsidies can shift the supply or demand curves, and create an imbalance in the market. Alternatively, labor market inefficiencies, caused by an increase or decrease in wages or a shortage of labor, can have a similar effect on the supply and demand for goods. Unilateral action by a supplier or distributor can also influence market prices as they may refuse to sell goods or services below a certain price, even if this is greater than the equilibrium price.
What are the Effects of Disequilibrium?
The short-term effects of disequilibrium on the market include fluctuations in price and market volatility. Furthermore, the market is unlikely to self-regulate and will enter a new state of equilibrium, where supply and demand are balanced out, unless acted upon by external forces. Ultimately, if the new equilibrium is significantly different from the previous one, it could have long-term effects on the market, including rises or falls in demand or supply, and persistent market volatility.
How is Disequilibrium Resolved?
Disequilibrium can be resolved through stimulation of the market, either through external intervention or by incentivizing buyers to purchase and producers to produce goods and services. For example, a government may introduce tax breaks or subsidies to produce certain goods, or a company may introduce incentives to encourage consumers to buy a product. Similarly, producers may increase the supply of goods at a higher price in order to take advantage of higher demand and increase profits. Ultimately, these measures can restore the market to equilibrium.
In conclusion, disequilibrium is a disruption of the equilibrium state in which supply and demand are balanced. It can be caused by external forces such as government intervention, labor market inefficiencies, and unilateral action by a supplier or distributor. The resulting market volatility can have short-term and long-term effects, and disequilibrium can be resolved by stimulating the market either through external interventions or by encouraging buyers and producers to take advantage of higher demand.