Explain why shortages and surpluses

This is, however, not always the case as surplus and shortages often occur. This is the amount of a resource that exceeds the amount that is actively utilized. It can be used in the context of profits, goods, tax, income and capital. In an economic surplus, a consumer surplus occurs when the current price of goods is lower than the price consumers are willing to pay. This leads to an over purchase, hence causing a shortage in the product. A producer surplus occurs when products are availed to the market at a higher price than consumers are willing to pay, which leads to fewer purchases, hence an overproduction.

Due to the different price thresholds in sales and purchases and competition, a surplus often occurs as a result of a disconnect between demand and supply for a product. To remedy this, the government may implement a price floor, which is the minimum price a product should be sold. This however, often does not benefit the consumers but the businesses. In most instances, however, this imbalance naturally corrects itself.

A surplus often forces some producers to lower their prices. This in turn forces other firms to lower their prices, which leads to an increase in demand. This moves the market towards price and quantity equilibrium.

This is a condition whereby there is an excess demand of products in comparison to the quantity supplied in the market.

This causes market disequilibrium. Other causes of a shortage include the inability of a company to produce and supply goods and services, natural disasters and labor shortages as a result of business and consumer trends. Although a shortage may require government intervention, in most instances the imbalance clears out by itself.

In the case of a shortage, consumers cannot purchase as much as they would like. Eventually equilibrium will be reached. Back to Equilibrium. Join an Experiment. Copyright Experimental Economics Center. All rights reserved. Send us feedback. The market is not clear. It is in shortage. Market price will rise because of this shortage. Example: if you are the producer, your product is always out of stock. Will you raise the price to make more profit?

Most for-profit firms will say yes. Therefore, shortage drives price up. If a surplus exist, price must fall in order to entice additional quantity demanded and reduce quantity supplied until the surplus is eliminated. If a shortage exists, price must rise in order to entice additional supply and reduce quantity demanded until the shortage is eliminated.

Market is in surplus. Market is not clear. Market is in shortage. Government regulations will create surpluses and shortages in the market. When a price ceiling is set, there will be a shortage. When there is a price floor, there will be a surplus. Equilibrium price and quantity are determined by the intersection of supply and demand.

A change in supply, or demand, or both, will necessarily change the equilibrium price, quantity or both. It is highly unlikely that the change in supply and demand perfectly offset one another so that equilibrium remains the same. Example: This example is based on the assumption of Ceteris Paribus.