Consider an exchange economy with two goods, good 1 and good 2, and two consumers, A and B

This simple economy is not in equilibrium. Points "a" and "b" in the diagram show the bundles of goods 1 and 2 currently held by, respectively, consumers A and B. Points (a') and (b') show their respective preferred bundles. The current price ratio is indicated by the straight line (P1/P2). Indifference curves for A (IA) and B (IB) are drawn tangent to P1/P2 at their preferred equilibrium consumption points. The indifference curves indicate clearly that both individuals would be better off if they could achieve the new equilibrium points at the current price ratio. This is because indifference curves through their current positions (not drawn) would be below those through the desired positions.

In order to achieve his desired position, A wants to get 5 more units of good 1 and is willing to give up 5 units of good 2. B, on the other hand, wants to give up 8 units of good 1 and to acquire 10 more units of good 2 to achieve his preferred position. Therefore, more of good 1 is offered by B than is demanded by A and less of good 2 is offered by A than is demanded by B. As a result, P1 would fall and P2 would rise so that the ratio of prices (P1/P2) would fall. That is, the price ratio line (P1/P2) would become steeper and a new equilibrium would be achieved for each individual at the new price ratio that was established.