Effects of Shortage - Online Tutor, Practice Problems & Exam Prep

When the price is set too low, a shortage occurs, where quantity demanded exceeds quantity supplied. For example, at a price of $4, suppliers may provide 6 units, while demand could reach 15 units, resulting in a shortage of 9 units. This situation highlights the law of supply and demand, emphasizing the importance of equilibrium price in achieving market balance. Understanding these concepts is crucial for analyzing market dynamics and recognizing the implications of price controls, such as price ceilings, which can lead to excess demand.

Shortage

Now let's see a situation where the price is set too low. So when we have a price too low, we're going to have what's called a shortage, meaning there's not enough in this situation, right? Before we had too much, now we have not enough. Now the quantity demanded is going to be greater than the quantity supplied. People want more than suppliers are willing to produce at the price. Okay. So let's go ahead. Just like before, we had our equilibrium price of 6 here right? Let's go ahead and set a low price. Let's go with 4. The price of 4 here and well, first let's label our axes, right? Price, quantity, demand, double d is going down, supply is the other one. So let's set our price too low here at 4. So I'm going to put p with an l for low and that'll be at 4, and let's go ahead and supply comes first, let's go ahead and see what the quantity supplied would be at this price. So the price of 4, it looks like suppliers are willing to put out 6 units. The quantity supplied is going to be 6 units at a price of 4, and how much are people going to demand at this price? Hey, this is a really good price. $4 I want this many pizzas over here right. 15 pizzas, the quantity demanded is way higher than the quantity supplied, right. We're seeing a big discrepancy here. We're not at equilibrium because the quantity supplied is not equal to the quantity demanded and we have what we're going to call a shortage, represented by this amount of quantity shortage right here. Right. So the shortage in this case, if they're supplying 6 units and they're demanding 15 units right, we have a shortage of 9 units. Okay? Alright. So we'll do one more thing here to talk about the law of supply and demand. Let's do that in the next video.

Here’s what students ask on this topic:

What causes a shortage in a market?

A shortage in a market occurs when the quantity demanded exceeds the quantity supplied at a given price. This typically happens when the price is set too low, either due to market conditions or price controls like price ceilings. For example, if the price of a product is set at $4, but at this price, suppliers are only willing to provide 6 units while consumers demand 15 units, a shortage of 9 units arises. This imbalance highlights the importance of the equilibrium price, where supply equals demand, in maintaining market stability.

How does a price ceiling lead to a shortage?

A price ceiling is a government-imposed limit on how high a price can be charged for a product. When a price ceiling is set below the equilibrium price, it results in a lower price that increases the quantity demanded while decreasing the quantity supplied. For instance, if the equilibrium price of a product is $6, but a price ceiling is set at $4, suppliers may only provide 6 units while consumers demand 15 units, leading to a shortage of 9 units. This excess demand creates market inefficiencies and can lead to long-term supply issues.

What are the effects of a shortage on consumers and producers?

A shortage affects both consumers and producers in several ways. For consumers, a shortage means they cannot purchase the quantity of goods they desire at the current price, leading to unmet demand and potential dissatisfaction. For producers, a shortage indicates that they could potentially sell more units at a higher price, but the low price prevents them from doing so. This situation can lead to lost revenue and inefficiencies in production. Additionally, shortages can result in long waiting times, black markets, and reduced quality of goods as producers may cut corners to meet high demand.

How can a market return to equilibrium after a shortage?

A market can return to equilibrium after a shortage by allowing the price to rise. As the price increases, the quantity demanded will decrease, and the quantity supplied will increase until they are equal. This adjustment process is guided by the law of supply and demand. For example, if a shortage occurs at a price of $4, raising the price towards the equilibrium price of $6 will reduce the quantity demanded and increase the quantity supplied, eventually eliminating the shortage and restoring market balance.

What is the role of the equilibrium price in preventing shortages?

The equilibrium price is the price at which the quantity demanded equals the quantity supplied. It plays a crucial role in preventing shortages by ensuring that the market is balanced. When the price is at equilibrium, there is no excess demand or excess supply, meaning that consumers can purchase the quantity they want, and producers can sell the quantity they produce. If the price is set too low, it disrupts this balance, leading to a shortage where demand exceeds supply. Therefore, maintaining the equilibrium price is essential for market stability and efficiency.