Learning Objectives

When do shortages or surplus' occur?

When the market is in disequilibrium, the clearance price of goods has been disturbed. This results in sellers producing either too much goods that exceeds demand, or not producing enough goods to meet the demand.

Shortages

Shortages occur when demand is greater than supply. This means that the price is lower than the equilibrium price, meaning that the quantity demanded is a lot bigger than the quantity supplied, as producers are less willing to make more goods if they receive a lower price.

This results in goods being sold too quickly, which leaves some consumers disappointed. To correct this issue, producers will raise the price to reduce demand from consumers and increase their willingness to supply. After there has been a new price introduced, the market will return to a new equilibrium point.

As shown by the model above, the price is set below the market equilibrium of (Q, P), demonstrated by the price set at (P1). For this price, suppliers are willing to produce at (Qs), but consumers are willing to purchase more goods, shown as point (Qd). As these values do not equal, this is known as an output gap or a shortage of unsold goods.

Surplus'

Surplus' occurs when supply is greater than demand. This means that the price is higher than the equilibrium price, meaning that the quantity supplied is a lot bigger than the number of goods demanded. This is because fewer consumers are willing to buy goods for a high price, but producers are willing to supply these goods as they receive a higher price per item sold.

This results in goods being left over which are not sold. To correct this issue, producers will lower the price and offer discounts in order to increase demand from consumers and sell the leftover stock. Eventually, after correction, the market will return to a new equilibrium price.

As shown by the model above, the price is set above the market equilibrium of (Q, P), demonstrated by the price set at (P1). For this price, suppliers are willing to produce at (Qs), but consumers are willing to purchase less goods, shown as point (Qd). As these values do not equal, this is known as an output gap or a surplus of unsold goods.