Market equilibrium refers to the position where demand for a product is equal to the supply of the product. At the point the equilibrium price also is known as the market price.

At the equilibrium market price the quantity consumers wish to buy is exactly equal to the quantity producers wish to sell.

Market Equilibrium illustration

Market disequilibrium occurs when the quantity demanded for a product is either higher or lower than the quantity supplied. Disequilibrium is inefficient as it means there are either excess demand or excess supply.

At price P1 there is an excess supply. Price will need to fall to persuade consumers to buy more and for producers to contract their supply. At price P2 there is an excess demand. Price will need to rise to reduce consumer demand and to encourage producers to supply more.

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