Shortages and Surpluses

In economics, a shortage (or excess demand) occurs when the quantity demanded of a product or service exceeds its supply. Conversely, a surplus (or excess supply) happens when the quantity supplied is greater than the quantity demanded. These situations represent market disequilibrium, where the forces of supply and demand are not balanced. 

Shortage:

• Definition:

  When the quantity demanded at a given price is higher than the quantity supplied.
• 
  
•  
• Cause:

  Shortages can be caused by various factors, including increased demand, decreased supply, or price ceilings (maximum prices set by the government). 
• 
  
• 
  
• Example:

  A popular new product might experience a shortage if demand is higher than initially anticipated. 
• 
  
• 
  
• Market Response:

  In a free market, prices will typically rise to alleviate the shortage, as consumers are willing to pay more to acquire the limited supply.
• 
  
•  

Surplus:

• Definition:

  When the quantity supplied at a given price is higher than the quantity demanded.
• 
  
•  
• Cause:

  Surpluses can be caused by decreased demand, increased supply, or price floors (minimum prices set by the government).
• 
  
• 
  
•  
• Example:

  A bumper crop of agricultural goods might lead to a surplus if demand doesn't increase to match the increased supply. 

• Market Response:

  In a free market, prices will typically fall to clear the surplus, as producers lower prices to sell excess inventory. 

Market Equilibrium:

• Both shortages and surpluses are examples of market disequilibrium, meaning the market is not in balance.
• 
  
•  
• The point where supply and demand intersect on a graph represents market equilibrium, where the quantity demanded equals the quantity supplied. 
• In a free market, the forces of supply and demand tend to move the market towards equilibrium. 

Google searches for the subject above