Economic shortage

Economic shortage is a term describing a disparity between the demand for a product or service and its supply in a market. Specifically, a shortage occurs when there is excess demand; therefore, it is the opposite of a surplus.

Shortages are related to price - when the price of an item is "too low," there will be a shortage. In most cases, a shortage will compell firms to increase the price of a product until it reaches market equilibrium. Sometimes, however, external forces cause more permanent shortages - in other words, there is something preventing prices from rising or otherwise keeping supply and demand unbalanced.

Causes

Shortages may be caused by a variety of factors, including:

• Price ceilings, a type of price control which involves a government-imposed limit on the price of a product service.
• Government ban on the sale of a product or service, such as prostitution or certain recreational drugs.
• Many forms of market failure, such as monopolies, oligopolies or the free-rider problem.

Effects

In the case of government intervention in the market, there is always a trade-off, with positive and negative effects. For example, a price ceiling may cause a shortage, but it will also enable a certain portion of the population to purchase a product that they couldn't afford at market costs.

More generally, regardless of their cause, shortages may result in:

• Black markets - illegal markets in which products that are unavailable in conventional markets are sold, or in which products with excess demand are sold at higher prices than in the conventional market.
• Artificial controls on demand, such as time (for example waiting in line) and rationing.
• Price discrimination
• The inability to purchase a product.

Examples

• 1973 oil crisis, during which long lines and rationing were used to control demand.
• Prohibition, which resulted in the creation of a black market for liquor.