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A shortage, in economic terms, is a condition where the quantity demanded is greater than the quantity supplied at the market price. A shortage can be contrasted with a surplus.
In a normally functioning market, there is an equilibrium between the quantity demanded and quantity supplied at a price point dictated by market forces. A shortage is a situation in which demand for a product or service exceeds the available supply. When this occurs, the market is said to be in a state of disequilibrium. Usually, this condition is temporary as the product will be replenished and the market regains equilibrium. Note that shortage should not be confused with the economics term "scarcity," in that shortages are usually temporary and can be corrected, while scarcities tend to be systemic and cannot be readily replenished. There are three main causes of shortage:
Possible causes of a shortage include miscalculation of demand by a company producing a good or service, resulting in the inability to keep up with demand, or government policies such as price-fixing or rationing. Natural disasters that devastate the physical landscape of a region can also cause shortages of such essential products as food and housing, also leading to higher prices of those goods. Global consumer and business trends can also create commodities and labor shortages. Shortages are more common in command economies. This is where the government will not allow the free market to dictate the price of a commodity or service based on the forces of supply/demand. When this happens, an artificially high number of people may decide to purchase that item because of the low price. For example, if the government provides free doctor visits as part of a national healthcare plan, consumers may experience a shortage of doctor services. This is because people are more likely to visit a doctor when they no longer have to pay directly for the cost. Some examples of shortages in different markets include the following: In 2016, chocolate makers faced a shortage of cocoa beans because of falling supplies of the raw commodity and increased demand for chocolate. In 2015, the global demand for chocolate rose by 0.6% to 7.1 million tons. However, the production of cocoa from leading cocoa bean suppliers in areas such as Ghana and the Ivory Coast fell by 3.9%, causing the global supply of cocoa beans to fall to just 4.1 million tons. A factor in the increased demand was that consumption of chocolate candy is has been on the rise in places like China and India. Overall, the demand for cocoa in Asia jumped by 5.9% in 2015. As a result, the price of cocoa in 2015 rose to over $3,100 per metric ton, the highest level since 2012. To reverse the cocoa shortage, leading chocolate producers, such as Nestle S.A., are partnering to educate West African cocoa farmers on best practices and techniques to boost their production. Economic and technology trends can also create job market shortages when the need for workers with new skills rises. For example, the expansion of cloud computing in government and healthcare services has also created an increased risk of cybercriminal activity. Cybersecurity professionals are needed to keep business and government systems safe from ongoing hacker threats. There is, however, a shortage of workers with the skills needed to fill this career specialty. The U.S. Bureau of Labor Statistics (BLS) reports that there were more than 200,000 unfilled cybersecurity job openings in 2020. The BLS also projects that the demand for cybersecurity professionals will rise by 33% between 2020 and 2030, which is much higher than in other industries.
A labor shortage occurs when there are not enough qualified job candidates to fill all open positions. This can happen in new industries where few people have the requisite skills or training. It can also happen in a growing economy where certain job seekers will not settle for a less attractive job. In 2021, following the COVID19 lockdowns, the U.S. experienced a sharp labor shortage in conjunction with the "Great Resignation," when more than 47 million workers quit their jobs, many of whom were in search of an improved work-life balance and flexibility, increased compensation, and a strong company culture.
An energy shortage occurs when there is not sufficient electrical power generation or transmission to serve a particular population. This can be caused by high energy prices, old infrastructure, and increasing demand. Hot temperatures, for example, can add stress to the electric grid as people turn on air conditioners all at once. The result can be a shortage, leading to brownouts or blackouts. Another cause can be a disruption to oil or other energy imports, due to geopolitical events, natural disaster, or similar crises.
A water shortage occurs when a region does not have enough clean and safe drinking water to satisfy its population. This can have severe health and economic impacts. As of 2022, there are 17 countries at risk of a water shortage (most in the Middle East), including Qatar, Israel, Lebanon, Iran, Jordan, Libya, Kuwait, Saudi Arabia, Eritrea, United Arab Emirates, San Marino, Bahrain, India, Pakistan, Turkmenistan, Oman, and Botswana.
Learning Objectives
In order to understand market equilibrium, we need to start with the laws of demand and supply. Recall that the law of demand says that as price decreases, consumers demand a higher quantity. Similarly, the law of supply says that when price decreases, producers supply a lower quantity. Because the graphs for demand and supply curves both have price on the vertical axis and quantity on the horizontal axis, the demand curve and supply curve for a particular good or service can appear on the same graph. Together, demand and supply determine the price and the quantity that will be bought and sold in a market. These relationships are shown as the demand and supply curves in Figure 1, which is based on the data in Table 1, below.  Figure 1. The supply and demand curves for gasoline.
If you look at either Figure 1 or Table 1, you’ll see that at most prices the amount that consumers want to buy (which we call the quantity demanded) is different from the amount that producers want to sell (which we call the quantity supplied). What does it mean when the quantity demanded and the quantity supplied aren’t the same? The answer is: a surplus or a shortage. Surplus or Excess SupplyLet’s consider one scenario in which the amount that producers want to sell doesn’t match the amount that consumers want to buy. Consider our gasoline market example. Imagine that the price of a gallon of gasoline were $1.80 per gallon. This price is illustrated by the dashed horizontal line at the price of $1.80 per gallon in Figure 2, below. Figure 2. A price above equilibrium creates a surplus. At this price, the quantity demanded is 500 gallons, and the quantity of gasoline supplied is 680 gallons. You can also find these numbers in Table 1, above. Now, compare the quantity demanded and quantity supplied at this price. Quantity supplied (680) is greater than quantity demanded (500). Or, to put it in words, the amount that producers want to sell is greater than the amount that consumers want to buy. We call this a situation of excess supply (since Qs > Qd) or a surplus. Note that whenever we compare supply and demand, it’s in the context of a specific price—in this case, $1.80 per gallon. With a surplus, gasoline accumulates at gas stations, in tanker trucks, in pipelines, and at oil refineries. This accumulation puts pressure on gasoline sellers. If a surplus remains unsold, those firms involved in making and selling gasoline are not receiving enough cash to pay their workers and cover their expenses. In this situation, some firms will want to cut prices, because it is better to sell at a lower price than not to sell at all. Once some sellers start cutting prices; others will follow to avoid losing sales. These price reductions will, in turn, stimulate a higher quantity demanded. How far will the price fall? Whenever there is a surplus, the price will drop until the surplus goes away. When the surplus is eliminated, the quantity supplied just equals the quantity demanded—that is, the amount that producers want to sell exactly equals the amount that consumers want to buy. We call this equilibrium, which means “balance.” In this case, the equilibrium occurs at a price of $1.40 per gallon and at a quantity of 600 gallons. You can see this in Figure 2 (and Figure 1) where the supply and demand curves cross. You can also find it in Table 1 (the numbers in bold). Shortage or Excess DemandLet’s return to our gasoline problem. Suppose that the price is $1.20 per gallon, as the dashed horizontal line at this price in Figure 3, below, shows. At this price, the quantity demanded is 700 gallons, and the quantity supplied is 550 gallons. Figure 3. A price below equilibrium creates a shortage. Quantity supplied (550) is less than quantity demanded (700). Or, to put it in words, the amount that producers want to sell is less than the amount that consumers want to buy. We call this a situation of excess demand (since Qd > Qs) or a shortage. In this situation, eager gasoline buyers mob the gas stations, only to find many stations running short of fuel. Oil companies and gas stations recognize that they have an opportunity to make higher profits by selling what gasoline they have at a higher price. These price increases will stimulate the quantity supplied and reduce the quantity demanded. As this occurs, the shortage will decrease. How far will the price rise? The price will rise until the shortage is eliminated and the quantity supplied equals quantity demanded. In other words, the market will be in equilibrium again. As before, the equilibrium occurs at a price of $1.40 per gallon and at a quantity of 600 gallons. Generally any time the price for a good is below the equilibrium level, incentives built into the structure of demand and supply will create pressures for the price to rise. Similarly, any time the price for a good is above the equilibrium level, similar pressures will generally cause the price to fall. As you can see, the quantity supplied or quantity demanded in a free market will correct over time to restore balance, or equilibrium. Figure 4. Equilibrium is the point where the amount that buyers want to buy matches the point where sellers want to sell. Equilibrium: Where Supply and Demand IntersectWhen two lines on a diagram cross, this intersection usually means something. On a graph, the point where the supply curve (S) and the demand curve (D) intersect is the equilibrium. The equilibrium price is the only price where the desires of consumers and the desires of producers agree—that is, where the amount of the product that consumers want to buy (quantity demanded) is equal to the amount producers want to sell (quantity supplied). This mutually desired amount is called the equilibrium quantity. At any other price, the quantity demanded does not equal the quantity supplied, so the market is not in equilibrium at that price. It should be clear from the previous discussions of surpluses and shortages, that if a market is not in equilibrium, market forces will push the market to the equilibrium. If you have only the demand and supply schedules, and no graph, you can find the equilibrium by looking for the price level on the tables where the quantity demanded and the quantity supplied are equal (again, the numbers in bold in Table 1 indicate this point).
We’ve just explained two ways of finding a market equilibrium: by looking at a table showing the quantity demanded and supplied at different prices, and by looking at a graph of demand and supply. We can also identify the equilibrium with a little algebra if we have equations for the supply and demand curves. Let’s practice solving a few equations that you will see later in the course. Right now, we are only going to focus on the math. Later you’ll learn why these models work the way they do, but let’s start by focusing on solving the equations. Suppose that the demand for soda is given by the following equation: [latex]Qd=16–2P[/latex] where Qd is the amount of soda that consumers want to buy (i.e., quantity demanded), and P is the price of soda. Suppose the supply of soda is [latex]Qs=2+5P[/latex] where Qs is the amount of soda that producers will supply (i.e., quantity supplied). (Remember, these are simple equations for lines). Finally, recall that the soda market converges to the point where supply equals demand, or [latex]Qd=Qs[/latex] We now have a system of three equations and three unknowns (Qd, Qs, and P), which we can solve with algebra. Since [latex]Qd=Qs[/latex], we can set the demand and supply equations equal to each other: [latex]\begin{array}{c}\,\,Qd=Qs\\16-2P=2+5P\end{array}[/latex] Step 1: Isolate the variable by adding 2P to both sides of the equation, and subtracting 2 from both sides. [latex]\begin{array}{l}\,16-2P=2+5P\\-2+2P=-2+2P\\\,\,\,\,\,\,\,\,\,\,\,\,\,\,\,14=7P\end{array}[/latex] Step 2: Simplify the equation by dividing both sides by 7. [latex]\begin{array}{l}\underline{14}=\underline{7P}\\\,\,\,7\,\,\,\,\,\,\,\,\,\,7\\\,\,\,\,2=P\end{array}[/latex] The equilibrium price of soda, that is, the price where Qs = Qd will be $2. Now we want to determine the quantity amount of soda. We can do this by plugging the equilibrium price into either the equation showing the demand for soda or the equation showing the supply of soda. Let’s use demand. Remember, the formula for quantity demanded is the following: [latex]Qd=16-2P[/latex] Taking the price of $2, and plugging it into the demand equation, we get [latex]\begin{array}{l}Qd=16–2(2)\\Qd=16–4\\Qd=12\end{array}[/latex] So, if the price is $2 each, consumers will purchase 12. How much will producers supply, or what is the quantity supplied? Taking the price of $2, and plugging it into the equation for quantity supplied, we get the following: [latex]\begin{array}{l}Qs=2+5P\\Qs=2+5(2)\\Qs=2+10\\Qs=12\end{array}[/latex] Now, if the price is $2 each, producers will supply 12 sodas. This means that we did our math correctly, since [latex]Qd=Qs[/latex] and both Qd and Qs are equal to 12. That confirms that we’ve found the equilibrium quantity.
Watch this video for a closer look at market equilibrium: Equilibrium and Economic EfficiencyEquilibrium is important to create both a balanced market and an efficient market. If a market is at its equilibrium price and quantity, then it has no reason to move away from that point, because it’s balancing the quantity supplied and the quantity demanded. However, if a market is not at equilibrium, then economic pressures arise to move the market toward the equilibrium price and equilibrium quantity. This happens either because there is more supply than what the market is demanding or because there is more demand than the market is supplying. This balance is a natural function of a free-market economy. Also, a competitive market that is operating at equilibrium is an efficient market. Economists typically define efficiency in this way: when it is impossible to improve the situation of one party without imposing a cost on another. Conversely, if a situation is inefficient, it becomes possible to benefit at least one party without imposing costs on others. Figure 5. Demand and Supply for Gasoline: Equilibrium. At this equilibrium point, the market is efficient because the optimal amount of gasoline is being produced and consumed. Efficiency in the demand and supply model has the same basic meaning: the economy is getting as much benefit as possible from its scarce resources, and all the possible gains from trade have been achieved. In other words, the optimal amount of each good and service is being produced and consumed. We will explore this important concept in detail in the next module on applications of supply and demand.
efficiency: when the optimal amount of goods are produced and consumed, minimizing waste equilibrium: price and quantity combination where supply equals demand equilibrium price: the (only) price where the quantity supplied in a market equals the quantity demanded equilibrium quantity: the quantity both supplied and demanded at the equilibrium price shortage (or excess demand): situation where the quantity demanded in a market is greater than the quantity supplied; occurs at prices below the equilibrium surplus (or excess supply): situation where the quantity demanded in a market is less than the quantity supplied; occurs at prices above the equilibrium Contribute!Did you have an idea for improving this content? We’d love your input. Improve this pageLearn More |
When quantity demanded is greater than quantity supplied the resulting shortage causes the price to fall?
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