key term - Shortage

Definition

A shortage occurs when the quantity demanded of a good or service exceeds the quantity supplied at the prevailing market price. This imbalance between supply and demand results in a scarcity of the item, leading to increased competition and potential price increases.

5 Must Know Facts For Your Next Test

1. A shortage can occur due to an increase in demand, a decrease in supply, or a combination of both.
2. Shortages can lead to higher prices, as consumers compete for the limited available quantity of the good or service.
3. Shortages may also result in the rationing of the scarce resource, with consumers facing limits on the quantity they can purchase.
4. Governments may intervene in the market to address shortages through the implementation of price ceilings or other policy measures.
5. Shortages can have significant economic and social consequences, affecting the distribution of resources and the overall well-being of consumers and producers.

Review Questions

• Explain how a shortage can arise in a market and the effects it has on equilibrium price and quantity.
  • A shortage can arise when the quantity demanded of a good or service exceeds the quantity supplied at the prevailing market price. This imbalance between supply and demand leads to a scarcity of the item, causing the equilibrium price to rise and the equilibrium quantity to decrease. As consumers compete for the limited available quantity, the market price will increase until the quantity demanded equals the quantity supplied, establishing a new equilibrium point.
• Describe the four-step process for analyzing changes in equilibrium price and quantity, and how a shortage would impact this process.
  • The four-step process for analyzing changes in equilibrium price and quantity involves: 1) Identifying the initial equilibrium, 2) Determining the direction of the shift in supply or demand, 3) Determining the new equilibrium price and quantity, and 4) Comparing the new equilibrium to the initial equilibrium. In the case of a shortage, the process would involve a shift in demand or supply that leads to a new equilibrium with a higher price and lower quantity compared to the initial equilibrium.
• Evaluate how government interventions, such as price ceilings, can affect the occurrence and consequences of a shortage in a market.
  • Governments may intervene in a market experiencing a shortage through the implementation of price ceilings, which set a maximum legal price for a good or service. While a price ceiling can help make the scarce resource more affordable for consumers, it also leads to a persistent shortage, as the quantity demanded will exceed the quantity supplied at the artificially low price. This can result in the rationing of the resource, the creation of black markets, and other unintended consequences that may exacerbate the shortage and its economic and social impacts.

Related terms

Demand: The willingness and ability of consumers to purchase a good or service at various prices during a given time period.

Supply: The quantity of a good or service that producers are willing and able to sell at various prices during a given time period.

Equilibrium:

The point where the quantity demanded is equal to the quantity supplied, resulting in a stable market price.