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Shortage & Scarcity in Economics: Definition, Causes & Examples

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  • 0:01 Definition of Shortage…
  • 0:49 Causes of Shortages
  • 1:35 Example of Increased Demand
  • 2:37 Example of Decreased Supply
  • 3:49 Example of Government…
  • 4:49 Scarcity
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Lesson Transcript
Instructor: Kallie Wells
What causes goods to become unavailable all of a sudden? Is that considered scarcity or a shortage? These questions will be discussed in the lesson on shortages and what contributes to a shortage.

Definition of Shortage and Scarcity

A shortage occurs whenever quantity demanded is greater than quantity supplied at the market price. More people are willing and able to buy the good at the current market price than what is currently available. When a shortage exists, the market is not in equilibrium. At equilibrium, the quantity demanded equals the quantity supplied at the market price.

The term 'shortage' can be easily confused with scarcity, which is one of the underlying basic problems of economics. The easiest way to distinguish between the two is that scarcity is a naturally occurring limitation on the resource that cannot be replenished. A shortage is a market condition of a particular good at a particular price. Over time, the good will be replenished and the shortage condition resolved.

Causes of Shortages

A shortage occurs when more people want to buy a good at the current market price than what is available. There are three main reasons why a shortage can occur:

  1. Increase in demand (outward shift in demand curve)
  2. Decrease in supply (inward shift in supply curve)
  3. Government intervention

It's important to note that increases in demand or decreases in supply are not movements along the demand or supply curve. They are shifts in those curves due to other factors, not including price changing. For example, an increase in quantity demanded would be due to a decrease in price. A shift in demand may be due to a sudden market trend where everyone wakes up one morning all having to have a particular pair of shoes.

Example of Increased Demand

We all dread the heat waves that occur every summer. Temperatures soar into the triple digits, and we all have the same reaction - turn on the air conditioner! All of the sudden, the demand for energy increases. Most energy is scheduled the day prior at a market price. The unpredicted increase in demand for energy causes a shortage, also referred to as brownouts or blackouts.

The demand for energy is temporarily greater than the supply. This chart illustrates the shift in demand and how that results in shortage conditions on the basic market model. Before the shift in demand, the market price (P*) results in quantity demanded and quantity supplied of Q*. When the shift in demand (D to D prime) occurs, the quantity supplied at the market price P* remains at Qs, but the quantity demanded shifts out to Qd. The shortage is the difference between Qd and Qs, the quantity supplied and the quantity demanded with the shifted demand curve.

Shortage due to increased demand

Example of Decreased Supply

This one is for all of you wine connoisseurs out there! We all love harvest season when wineries are gearing up to create some amazing new blends and bottles of wine. Grapes are a delicate fruit that need particular climate conditions to peak perfectly. Those climate conditions cannot always be controlled and one night of atypical freezing temperatures can ruin a grape crop. What do you think happens to the wine market when all the grape crops suffer? There is a huge shift in the supply of wine because there were not enough grapes to produce the typical quantity of cases that season.

When supply shifts in, as seen in this chart, a shortage condition exists. Producers were not able to supply enough wine to meet demand at the market price. At the market price of P*, the quantity demanded and quantity supplied before the shift is set at Q*. After the shift in supply from S to S prime, the quantity supplied decreases from Q* to Qs prime while the demand remains at Qd. The difference between Qd and Qs prime is the shortage amount at the market price.

Shortage caused by decrease in supply

Example of Government Intervention

Government agencies can intervene in the market through several mechanisms. Often times, the mechanism they impose will cause either supply to decrease or demand to increase, both of which have been illustrated above. Another avenue is through price control. They can put a limit on how high the price of a particular good can go. This is known as a price ceiling. When a price ceiling is set below the market equilibrium price, it will cause a shortage.

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