What it means
Investopedia describes a shortage as demand for a product or service exceeding its supply at the market price, which leaves the market in disequilibrium. Usually this is temporary, because the product is replenished or the price changes and balance returns.
A shortage differs from scarcity. Scarcity is the permanent limit on resources compared with wants, while a shortage is a gap at one price and moment.
A shortage can be corrected, and scarcity cannot be removed. Investopedia lists three main causes: government intervention, such as a price ceiling; a fall in supply, such as a freeze that destroys a crop; and a rise in demand, such as a heatwave that pushes up energy use.
Wars, disasters and weak planning by firms can all play a part as well. OpenStax gives a clear case with rent control.
The original price is $500 for a typical apartment, and 15,000 units are supplied. After demand rises, 19,000 units are wanted at the capped price, which creates a shortage of 4,000 units.
OpenStax explains that price ceilings aim to keep prices low for people who need the product. When the price cannot rise to the equilibrium level, quantity demanded exceeds quantity supplied, so those who buy at the low price benefit, while sellers and buyers who cannot find the product lose.
Shortages can appear in food, energy, healthcare, labour, water, housing and technology, so check the cause before judging the fix, since the right answer for a crop failure differs from the right answer for a price cap. In a free market, rising prices usually pull more supply in and push some demand out.
When prices cannot move, other tools replace them, such as queues, rationing or waiting lists, and rules and prices differ by place, so check current local conditions.
In practice
Real-world examples.
Example
A fictional city caps rent at $500. At that price landlords supply 15,000 apartments and tenants want 19,000. The shortage is 19,000 - 15,000 = 4,000 apartments, and the gap is managed by waiting lists and informal payments rather than by price.
Example
A fictional frost destroys part of an orange crop. Supply of juice falls from 100,000 to 70,000 cartons a week at the usual price of $3, while demand stays at 100,000. The shortage is 30,000 cartons, so shops ration purchases or raise the price.
Example
A fictional heatwave raises demand for fans from 8,000 to 12,000 a week. The store can only supply 8,000 at the old price. The gap is 4,000 fans, or 33% of the new demand, and the shelves empty within days.
Formula
Calculation
Shortage = Quantity demanded - Quantity supplied, at a given price. Shortage as a share of demand = Shortage / Quantity demanded x 100. A surplus is the reverse, where quantity supplied is greater than quantity demanded at the price.
Worked example using the rent control case. At the capped rent of $500, tenants want 19,000 apartments and landlords supply 15,000. The shortage is 19,000 - 15,000 = 4,000 apartments.
As a share of demand, 4,000 / 19,000 x 100 = 21.1%, so about one in five of the apartments wanted at that price does not exist. In the fan example below, a shortage of 4,000 against demand of 12,000 gives 4,000 / 12,000 x 100 = 33.3%, a much deeper gap even though the unit shortage is the same.Case study
Seen in the real world.
This case study is fictional and illustrative. Elena, 29, in Lisbon, runs a small bakery and finds that flour is hard to buy after a poor harvest. Her supplier can deliver 600 kg a week, but she needs 900 kg. The gap is 300 kg, or one third of her need. She asks two other suppliers and finds that prices have risen by 10%.
She decides to bake fewer varieties and keep the most popular loaves. She also raises prices by a small amount to cover the cost. After two months supply returns and she keeps a note of her second supplier. She keeps a larger stock before the next harvest, and she tracks the price of flour each week so she can act early next time. The numbers show why she acted.
At $1.00 a kg, 900 kg would have cost $900 a week. With 600 kg at $1.00 from her usual supplier and 300 kg at the new price of $1.10, the bill is $600 + $330 = $930, an increase of $30 a week, or 3.3%. The extra cost was small, but running out of flour would have cost her far more in lost sales.
Watch out
Common mistakes.
- Confusing a shortage with scarcity, when a shortage is a temporary gap at a given price.
- Ignoring the price cap, which can create a shortage by keeping the price below equilibrium.
- Assuming a shortage means a product is gone, when it only means demand exceeds supply at that price.
Questions
People also ask.
What is a shortage in economics?
It is when the quantity demanded of a good is more than the quantity supplied at the market price. The market is out of balance.
How is a shortage different from scarcity?
A shortage is usually temporary and can be fixed. Scarcity is the permanent limit on resources compared with wants.
What can cause a shortage?
A price ceiling, a fall in supply or a rise in demand. Disasters and wars can also cause them.
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