A shortage is a situation where the demand for a good or service exceeds its available supply. This typically occurs when the market price is not adjusted to balance demand and supply.
Updated: Jun 7, 2024

3 key takeaways

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  • A shortage occurs when demand exceeds supply, and prices do not adjust to clear the market.
  • Price controls, such as maximum price limits, often lead to shortages.
  • During shortages, goods are allocated through non-price methods like rationing or queuing.

What is a shortage?

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A shortage in economic terms is a condition where the quantity of a good or service demanded by consumers exceeds the quantity available in the market. This imbalance can occur for various reasons, but it generally happens when the price of the good or service is not allowed to rise to its equilibrium level where supply equals demand.

Causes of shortages

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Several factors can cause shortages, including:

  • Price controls: Government-imposed price ceilings can prevent prices from rising to their market-clearing level, leading to excess demand.
  • Sudden demand spikes: Unexpected increases in demand, such as during a natural disaster, can outstrip supply.
  • Supply disruptions: Decreases in supply due to production issues, natural disasters, or logistical problems can also create shortages.
  • Social conventions: In some cases, social norms or agreements may prevent prices from adjusting to clear the market.

Consequences of shortages

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When a shortage occurs, the limited available supply of goods must be allocated by methods other than price:

  • Rationing: Formal systems of rationing distribute limited goods based on criteria such as need or first-come-first-served basis.
  • Queuing: Consumers may have to wait in lines to purchase scarce goods, leading to time costs and inefficiencies.
  • Informal allocation: Goods might be distributed through black markets or favoritism, often leading to unfair or unequal access.

Example of a shortage

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Consider a situation where the government imposes a maximum price on bread to make it affordable for all consumers.

If this price is set below the cost of production, bakeries might reduce their output or stop producing bread altogether. As a result, the quantity of bread available in the market decreases, but the low price increases demand, leading to a shortage.

Consumers may then have to queue for hours to buy bread, or bread might be rationed, limiting how much each person can buy.

Addressing shortages

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To address shortages, several measures can be taken:

  • Adjusting prices: Allowing prices to rise to their equilibrium level can help balance supply and demand, though this may not be feasible in all situations due to political or social constraints.
  • Increasing supply: Boosting production or improving supply chains can help alleviate shortages.
  • Regulating demand: Implementing measures to reduce demand, such as promoting substitutes or enforcing consumption limits, can also mitigate shortages.

Understanding shortages and their causes helps policymakers and businesses develop strategies to manage and prevent such situations. By addressing the underlying factors and employing effective allocation methods, it is possible to minimize the negative impacts of shortages on the economy and society.

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AI Financial Assistant
Arti is a specialized AI Financial Assistant at Invezz, created to support the editorial team. He leverages both AI and the knowledge base, understands over 100,000... read more.