Shortage vs. Surplus
Let’s start with some basic concepts… “A shortage exists at a market price when the quantity demanded exceeds the quantity supplied.” (i.e., excess demand) “A surplus exists at a market price when the quantity supplied exceeds the quantity demanded.” (i.e., excess supply) (Dodge 62)
Increase in Demand Winter Blizzard! The price of rock salt “skyrockets” to $17/bag. Initial equilibrium price was $2.79/bag. “With the forecast of a blizzard, consumers expect a lack of future availability for” rock salt. Result = an increase in the demand for rock salt creating a shortage. Market cure = a higher equilibrium price - $17/bag S D1D1 D Shortage P Q qq1q (Dodge 63)
Decrease in Demand Recession caused a decrease in the demand for cars (a normal good) Manufacturers discounted sticker prices and offered a zero interest rate, along with other incentives. When the demand fell there was a surplus of cars at the original price. Market cure = lower the equilibrium price; resulting in fewer cars being purchased and sold. S D1D1 D Surplus P Q qq1q1 p1p1 18,000 (Dodge 63)
Remember! “When demand increases, equilibrium price and quantity both increase.” P & Q “When demand decreases, equilibrium price and quantity both decrease.” P & Q (Dodge 64)
Increase in Supply “Advancement in computer technology and production methods” Increased the supply of laptop computers = surplus of laptops Market cure allow the price to fall = more demand. S D Surplus P Q qq1q1 p1p1 4000S1S1 (Dodge 64)
Decrease in Supply “Geopolitical conflict in the Middle East usually shows the production of crude oil.” A decrease “in the global supply of oil” = “a shortage of crude oil in the global market” Result = higher prices S D Shortage P Q qq1q1 p1p1 20 S1S1 (Dodge 64)
Remember! When supply increases, equilibrium price decreases and quantity increases. P & Q When supply decreases, equilibrium price increases and quantity decreases. P & Q
Works Cited Dodge, Eric R. “5 Steps to a 5 AP Microeconomics/ Macroeconomics”. New York, NY: McGraw-Hill