Shortage

A shortage occurs when the quantity demanded is higher than the available supply. When the demand for a good rises but there are a few in supply there are two things that could happen. Buyers would bid the price up in order to secure a share of that scarce resource or producers would try to slow the demand by raising the price and bring the equilibrium to higher levels so only the most desperate buyers are left before they can match their production with the trend in demand.

According to the law of demand, when the price rises the quantity demanded would fall that is as long as consumer's income or available resources didn't increase with the rise in price of common goods. An increase in income or the degree of importance of the good in everyday living would keep demand steady with a rising price. This scenario is usually accompanied with an expanding economy since there is no drop in demand on rising prices. There is a threshold for this expansion of course, as producers continually make more to match demand everybody would in one point over do it causing supply to go past higher with the new equilibrium and would eventually trigger a drop in prices due to a surplus.


Previous | Next

Stocks | Forex | Options | Economics | Bonds | History | Language learning | Technology | Technical Analysis | Fundamental Analysis
Copyright © 2014 econtrader | Risk disclosure | Terms of Use