Shortages (demand exceeding supply) and surpluses (supply exceeding demand)
The Allocation of Resources – Price Determination
What is a Shortage?
Imagine a popular ice‑cream stand on a hot day. Demand (how many people want ice‑cream) is higher than Supply (how many cones the stand can make). The result is a shortage – people are left waiting, and the price tends to rise.
- More customers than cones.
- Price increases until the number of cones sold matches the number of customers.
- Some customers may leave the line (they are price takers).
What is a Surplus?
Now picture a bakery that has baked 200 loaves of bread, but only 150 people come in. The bakery has a surplus – more goods than customers. The price usually falls to attract more buyers.
- More goods than buyers.
- Price falls until the quantity demanded equals the quantity supplied.
- Some loaves may go unsold (they are excess inventory).
Supply and Demand Curves
In a simple market we can write the demand and supply equations as:
- Demand: $Q_d = a - bP$
- Supply: $Q_s = c + dP$
Where $P$ is price, $Q$ is quantity, and $a, b, c, d$ are constants.
Equilibrium
When $Q_d = Q_s$, the market is in equilibrium. The equilibrium price $P^*$ and quantity $Q^*$ can be found by solving:
$$ a - bP^* = c + dP^* $$ $$ P^* = \frac{a - c}{b + d} $$ $$ Q^* = a - bP^* $$
Visualising Shortage and Surplus
| Price ($) | Quantity Demanded | Quantity Supplied | Result |
|---|---|---|---|
| 5 | 120 | 80 | Shortage 📉 |
| 10 | 70 | 110 | Surplus 📈 |
Exam Tip: Identify the Market Condition
When you see a diagram or data table, first check whether the quantity demanded is higher or lower than the quantity supplied at the given price.
- Write Shortage if $Q_d > Q_s$.
- Write Surplus if $Q_s > Q_d$.
- Explain what will happen to the price (rise or fall) and why.
Remember: Price is the signal that moves the market back towards equilibrium.
Quick Analogy: The Classroom
Think of a classroom where the teacher (price) decides how many students (buyers) can sit at each desk (goods). If too many students try to sit (high demand) but there are not enough desks (low supply), the teacher raises the “seat price” – maybe by asking for extra homework – to reduce the number of students. If there are many empty desks (high supply) but few students, the teacher lowers the “seat price” to attract more students.
Revision
Log in to practice.