Equilibrium (Market Equilibrium) is where plans match. At any other price there is a gap, and the gap has a name.
Key idea
At a price below equilibrium, quantity demanded exceeds quantity supplied: a shortage of $Q_d - Q_s$. Buyers compete and the price tends to rise. At a price above equilibrium, quantity supplied exceeds quantity demanded: a surplus of $Q_s - Q_d$. Sellers cut prices and the price tends to fall.
Why it works
A low price does two things at once: it makes buyers want more (along demand) and sellers offer less (along supply), so the gap opens from both sides. As the price rises, buyers drop out and sellers offer more, closing the gap from both sides until it is gone at $P^*$. A high price works the same way in reverse.
Worked example: Below equilibrium
With $Q_d = 20 - 2P$ and $Q_s = -4 + 2P$, what happens at a price of \$4?
- $Q_d = 20 - 8 = 12$ and $Q_s = -4 + 8 = 4$.
- Buyers want more than is offered: a shortage of $12 - 4 = 8$ units.
- The price tends to rise toward \$6.
Answer: A shortage of 8; the price is pushed up.
Worked example: Above equilibrium
Same market, price \$9.
- $Q_d = 20 - 18 = 2$ and $Q_s = -4 + 18 = 14$.
- A surplus of $14 - 2 = 12$ units; sellers cut prices toward \$6.
Answer: A surplus of 12; the price is pushed down.
You can see these gaps in daily life. Shortages show up as lines, waiting lists and empty shelves; surpluses as piles of unsold goods and clearance sales. When a law keeps the price from moving, the gap lasts: that is the subject of Price Ceilings and Price Floors.
Common mistake
Confusing a shortage with scarcity, or thinking a surplus pushes the price up. Scarcity is always there; a shortage exists only at a price below equilibrium, and goes away when the price rises. A surplus means unsold goods, so the pressure is down. Check: compare the price with $P^*$. Below means shortage and up; above means surplus and down.