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Identifying Shortages and Surpluses in Microeconomics

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  • 0:01 Finding Equilibrium
  • 0:57 Shortages
  • 2:13 Surpluses
  • 3:28 Correcting Each
  • 4:17 Lesson Summary
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Lesson Transcript
Instructor: Kevin Newton

Kevin has edited encyclopedias, taught middle and high school history, and has a master's degree in Islamic law.

Supply shortages and surpluses are inefficient for business, but economics seeks to avoid them. In this lesson, find out how they happen, as well as how businesses work to avoid them.

Finding Equilibrium

You may remember from earlier lessons that an increase in supply has a direct correspondence to the price paid per item: producers naturally will want to sell more of an item if it pays to do so. On the other hand, demand is inversely related to price: consumers are loathe to pay high prices. This means that, under ideal conditions, supply and demand cross when graphed together, making a gigantic X. The point at which these two lines intersect is called the market equilibrium. The market equilibrium is the point at which supply meets demand, which is also the point of the greatest possible efficiency in the economy. Of course, suppliers could become more efficient, causing a shift in the graph, but we're not talking about manufacturing efficiency here. Instead, we are concerned with the whole market.

Shortages

However, that is at equilibrium. Needless to say, equilibrium doesn't always happen. Take a new release book, for example. Chances are you've wanted a new release at least once, preferably the day it comes out. You are waiting anxiously at the bookstore for the midnight release, and just as you come through the line, you are told that the bookstore has ran out of copies. You're furious! What the bookstore has just experienced is a shortage, when supply does not meet demand. Now, imagine the book was a gift for someone you really cared about. You may be inclined to offer a higher price to someone who acquired the book so that you can get it right then and there. This is completely natural, and is exactly what economics tells us will happen during a supply shortage. During such a shortage, people are willing to pay higher prices to obtain the goods they want. On a supply and demand graph, the supply curve shifts to the left to lower the amount of goods available. The demand line does not move, but since the intersect moves up in price and down in quantity, equilibrium moves to a new point on the curve.

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