Shortage

A shortage occurs when a given price quantity supplied is less than the quantity demanded.

What Is a Shortage?

A shortage, in economic terms, is a condition where the quantity demanded is greater than the quantity supplied at the market price.

KEY TAKEAWAYS

A shortage, in economic terms, is a condition where the quantity demanded is greater than the quantity supplied at the market price.
There are three main causes of shortage—increase in demand, decrease in supply, and government intervention.
Shortage should not be confused with "scarcity."

How a Shortage Works

In a normally functioning market, there is an equilibrium between the quantity demanded and quantity supplied at a price point dictated by market forces. A shortage is a situation in which demand for a product or service exceeds the available supply. When this occurs, the market is said to be in a state of disequilibrium. Usually, this condition is temporary as the product will be replenished and the market regains equilibrium. Shortage should not be confused with "scarcity," in that shortages are usually temporary and can be corrected, while scarcities tend to be systemic and cannot be replenished.

There are three main causes of shortage:

Increase in demand (outward shift in the demand curve): For example, a sudden heatwave leads to an unexpected demand for energy that cannot be met.
Decrease in supply (inward shift in supply curve): For example, an unexpected freeze results in the destruction of orange crops leading to a drastic reduction in the supply of orange juice.
Government intervention: Shortages can also be the result of government-imposed price ceilings.

Possible causes of a shortage include miscalculation of demand by a company producing a good or service, resulting in the inability to keep up with demand, or government policies such as price-fixing or rationing. Natural disasters that devastate the physical landscape of a region can also cause shortages of such essential products as food and housing, also leading to higher prices of those goods. Global consumer and business trends can also create commodities and labor shortages.

In command economies, shortages are fairly prevalent. The government will not allow the free market to determine the price of a product or service based on supply and demand dynamics. When this happens, a disproportionately large number of people may elect to buy the item due to its low price. Consumers may face a lack of doctor services if the government delivers free doctor visits as part of a national healthcare plan. This is because people are more inclined to go to the doctor if they are not responsible for the bill.

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