Question

How markets move from equilibrium through disequilibrium and towards a new equilibrium?

And then something happens... You are invited to provide a bibliographic reference to a reliable news source to these events which have had an impact on microeconomic markets and, in turn, an impact on the macroeconomy; limit of one example per student until others have responded. Markets are in equilibrium. All the sellers who want to sell at the market price sell. All the buyers who want to buy at the market price buy. And then something happens. The market for lobster is in equilibrium and then a volcano in Iceland explodes... what happens? The market for car replacement parts is in equilibrium and then the nuclear power plants in Japan are shut down after a tsunami... what happens? The market for beef is in equilibrium and then we get mad cow disease... what happens? The market for corn is in equilibrium and then we get legislation to add ethanol to the mixture for gasoline... what happens in the domestic U.S. corn market? What happens in the market for tacos in Mexico? The market for quinoa is in equilibrium and then it becomes a culinary fad in the largest food market in the world... what happens? What happens to the farmers in South America who produce the crop? What happens to the people in South America who subsisted on quinoa? The market for kimchi is in equilibrium and then we get influenza... what happens? The market for badminton birdies is in equilibrium and then we get avian flu... what happens? These are actual events and have had impacts on markets.

Answer 1

When we say a market is in equilibrium, what we mean to say is that market supply and market demand for a good or service are equal. The price level at which this equilibrium is achieved is known as the equilibrium price, whereas the quantity of goods supplied at this equilibrium point is known as the equilibrium quantity. When external factors such as a volcanic eruption or a mad cow disease, etc, market forces are disrupted. In a nutshell, disruption in supply or demand prevents the market to reach an equilibrium. This is known as disequilibrium. But then again, the market forces of supply and demand drive price levels up or down to reach a new equilibrium again. E.g. - Due to the mad cow disease, supply for beef would be reduced(a disequilibrium), which would cause prices to rise up. But when prices rise up, market demand would decrease(as people won't buy at higher price levels) , causing prices to go down again , hence reaching a new equilibrium price level and quantity.