Market Surpluses & Market Shortages

Sometimes the market is not in equilibrium-that is quantity supplied doesn't equal quantity demanded.  When this
occurs there is either excess supply or excess demand.

A Market Surplus occurs when there is excess supply- that is quantity supplied is greater than quantity demanded. 
In this situation, some producers won't be able to sell all their goods.  This will induce them to lower their price to
make their product more appealing.  In order to stay competitive many firms will lower their prices thus lowering the
market price for the product.  In response to the lower price, consumers will increase their quantity demanded,
moving the market toward an equilibrium price and quantity.  In this situation, excess supply has exerted downward
pressure on the price of the product.

A Market Shortage occurs when there is excess demand- that is quantity demanded is greater than quantity
supplied.  In this situation, consumers won't be able to buy as much of a good as they would like.  In response to the
demand of the consumers, producers will raise both the price of their product and the quantity they are willing to
supply.  The increase in price will be too much for some consumers and they will no longer demand the product. 
Meanwhile the increased quantity of available product will satisfy other consumers.  Eventually equilibrium will be
reached.

The existence of surpluses or shortages in supply will result in disequilibrium, or a lack of balance
between supply and demand levels.

LEARNING OBJECTIVE[ edit ]

 Infer the outcomes of departures from equilibrium using the model of supply and demand

KEY POINTS[ edit ]

o Surpluses, or excess supply, essentially indicates that the quantity of a good or service

exceeds the demand for that particular good at the price in which the producers would
wish to sell (equilibrium level).

o In a perfectly competitive market, excess supply is equivalent to the quantity available in

the market beyond the equilibrium point of intersection between supply and demand.
This will result in a shift in market equilibrium towards lower price points.

o Shortage is a term used to indicate that the supply produced is below that of the
quantity being demanded by the consumers. This disparity implies that the current
market equilibrium at a given price is unfit for the current supply and demand
relationship.
o In a perfectly competitive market, a shortage in supply will ultimately result in a shift in
the equilibrium point, transitioning towards a higher price point due to the limited
supply availability.

TERMS[ edit ]

 surplus

That which remains when use or need is satisfied, or when a limit is reached.

 Disequilibrium

The loss of equilibrium or stability, especially due to an imbalance of forces.

 shortage

Not enough or not sufficient for a given demand.

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FULL TEXT[ edit ]

In the analysis of market equilibrium, specifically for pricing and volume determinations, a thorough
understanding of the supply and demand inputs is critical to economics. Surpluses and shortages on the
supply end can have substantial impacts on both the pricing of a specific product or service, alongside
the overall quantity sold over time. Shifts such as these in the supply availability results
in disequilibrium, or essentially a lack of balance between current supply and demand levels. Surpluses
and shortages often result in market inefficiencies due to a shifting market equilibrium.

Surpluses

Surpluses, or excess supply, indicate that the quantity of a good or service exceeds the demand for that
particular good at the price in which the producers would wish to sell (equilibrium level). This
inefficiency is heavily correlated in circumstances where the price of a good is set too high, resulting in a
diminished demand while the quantity available gains excess. There are substantial business risks
inherently built into the concept of surpluses, as the general outcome will be either selling off inventory
at sub-par prices or leftover unsold inventory. In both scenarios businesses will be forced to minimize
margins or incorporate losses on that particular good. Governmentalintervention can often
create surplus as well, particularly through the utilization of aprice floor if it is set at a price above the
market equilibrium .
Price Floor

A price floor ensures a minimum price is charged for a specific good, often higher than that what the
previous market equilibrium determined. This can result in a surplus.

In a perfectly competitive market, particularly pertaining to goods that are not perishable, excess supply
is equivalent to the quantity available in the market beyond the equilibrium point of intersection
between supply and demand. In this theoretical scenario the equilibrium point will transition towards a
lower price point due to the increased supply, which will in turn motivate consumers to purchase a
higher quantity as a result. This allows the economic model of the market to correct itself.

Shortages

Inversely, shortage is a term used to indicate that the supply produced is below that of the quantity
being demanded by the consumers. This disparity implies that the current market equilibrium at a given
price is unfit for the current supply and demand relationship, noting that the price is set too low. It could
also indicate that the desired good has a low level of affordability by the general public, and can be a
dangerous societal risk for necessary commodities. Indeed, Garrett Hardin emphasized that a shortage
of supply could also be perceived as a 'longage' of demand, as the two are inversely related. From this
vantage point shortages can be attributed to population growth as much as resource scarcity.

In a perfectly competitive market, a shortage in supply will ultimately result in a shift in the equilibrium
point, transitioning towards a higher price point due to the limited supply availability. This will prioritize
who receives the good or service based upon their willingness and ability to pay a premium for the
specific item in demand, leveraging those along the demand curve who are at higher levels with higher
ability and willingness to pay.

Source: Boundless. “Impacts of Surpluses and Shortages on Market Equilibrium.” Boundless Economics.

Boundless, 21 Jul. 2015. Retrieved 08 Sep. 2015
from https://www.boundless.com/economics/textbooks/boundless-economics-textbook/introducing-
supply-and-demand-3/market-equilibrium-48/impacts-of-surpluses-and-shortages-on-market-
equilibrium-180-12278/