Economic shortage
Encyclopedia
Economic shortage is a term describing a disparity between the amount demanded for a product
or service and the amount supplied in a market
. Specifically, a shortage occurs when there is excess demand; therefore, it is the opposite of a surplus
.
Economic shortages are related to price
—when the price of an item is set below the going rate determined by supply and demand, there will be a shortage. In most cases, a shortage will compel firm
s 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.
In common use, the term "shortage" may refer to a situation where most people are unable to find a desired good at an affordable price. In the economic use of "shortage", however, the affordability of a good for the majority of people is not an issue: If people wish to have a certain good but cannot afford to pay the market price, their wish is not counted as part of demand.
. Higher transaction costs and opportunity costs (e.g., in the form of lost time) also mean that the distribution process is wasteful. Both of these factors contribute to a decrease in aggregate wealth.
More generally, regardless of their cause, shortages may result in:
Other examples of economic shortages include:
Whether an economic shortage of a certain good or service is beneficial or detrimental to society often depends on one's ethical
and political
views. For instance, consider the shortage of recreational drugs discussed above, and the controversies around the use of such drugs. Likewise, consider the economic shortage of cars in the Soviet Union during the 1980s: On the one hand, people had to wait in line to buy a new car; on the other hand, cars were more affordable than they would have been at market prices.
emphasized that a shortage of supply can just as well be viewed as a "longage" of demand
. For instance, a shortage of food can just as well be called a longage of people (overpopulation
). By looking at it from this view, he felt the problem could be better dealt with.
Product (business)
In general, the product is defined as a "thing produced by labor or effort" or the "result of an act or a process", and stems from the verb produce, from the Latin prōdūce ' lead or bring forth'. Since 1575, the word "product" has referred to anything produced...
or service and the amount supplied in a market
Market
A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...
. Specifically, a shortage occurs when there is excess demand; therefore, it is the opposite of a surplus
Economic surplus
In mainstream economics, economic surplus refers to two related quantities. Consumer surplus or consumers' surplus is the monetary gain obtained by consumers because they are able to purchase a product for a price that is less than the highest price that they would be willing to pay...
.
Economic shortages are related to price
Price
-Definition:In ordinary usage, price is the quantity of payment or compensation given by one party to another in return for goods or services.In modern economies, prices are generally expressed in units of some form of currency...
—when the price of an item is set below the going rate determined by supply and demand, there will be a shortage. In most cases, a shortage will compel firm
Business
A business is an organization engaged in the trade of goods, services, or both to consumers. Businesses are predominant in capitalist economies, where most of them are privately owned and administered to earn profit to increase the wealth of their owners. Businesses may also be not-for-profit...
s 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.
In common use, the term "shortage" may refer to a situation where most people are unable to find a desired good at an affordable price. In the economic use of "shortage", however, the affordability of a good for the majority of people is not an issue: If people wish to have a certain good but cannot afford to pay the market price, their wish is not counted as part of demand.
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. Economic shortages are generally seen as undesirable since they lead to economic inefficiency. In absence of a price mechanism, resources are less likely to be distributed according to people's utilityUtility
In economics, utility is a measure of customer satisfaction, referring to the total satisfaction received by a consumer from consuming a good or service....
. Higher transaction costs and opportunity costs (e.g., in the form of lost time) also mean that the distribution process is wasteful. Both of these factors contribute to a decrease in aggregate wealth.
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 rationingRationingRationing is the controlled distribution of scarce resources, goods, or services. Rationing controls the size of the ration, one's allotted portion of the resources being distributed on a particular day or at a particular time.- In economics :...
. - Non-monetary bargaining methods, such as time (for example queuingQueue areaQueue areas are places in which people queue for goods or services. Examples include checking out groceries or other goods that have been collected in a self service shop, in a shop without self service, at an ATM, at a ticket desk, a city bus, or in a taxi stand.Queueing is a phenomenon in a...
), nepotismNepotismNepotism is favoritism granted to relatives regardless of merit. The word nepotism is from the Latin word nepos, nepotis , from which modern Romanian nepot and Italian nipote, "nephew" or "grandchild" are also descended....
, or even violence. - Price discriminationPrice discriminationPrice discrimination or price differentiation exists when sales of identical goods or services are transacted at different prices from the same provider...
- The inability to purchase a product.
Examples
- In the former Soviet UnionSoviet UnionThe Soviet Union , officially the Union of Soviet Socialist Republics , was a constitutionally socialist state that existed in Eurasia between 1922 and 1991....
during the 1980s, prices were artificially low by fiat (i.e., high prices were outlawed). Soviet citizens waited in line (or "queued") for various price-controlled goods and services such as cars, apartments, or some types of clothing. From the point of view of those waiting in line, such goods were in perpetual "short supply"; some of them were willing and able to pay more than the official price ceiling, but were legally prohibited from doing so. This method for determining the allocation of goods in short supply is known as "rationingRationingRationing is the controlled distribution of scarce resources, goods, or services. Rationing controls the size of the ration, one's allotted portion of the resources being distributed on a particular day or at a particular time.- In economics :...
".
Other examples of economic shortages include:
- 1973 oil crisis1973 oil crisisThe 1973 oil crisis started in October 1973, when the members of Organization of Arab Petroleum Exporting Countries or the OAPEC proclaimed an oil embargo. This was "in response to the U.S. decision to re-supply the Israeli military" during the Yom Kippur war. It lasted until March 1974. With the...
, during which long lines and rationing were used to control demand. - ProhibitionProhibitionProhibition of alcohol, often referred to simply as prohibition, is the practice of prohibiting the manufacture, transportation, import, export, sale, and consumption of alcohol and alcoholic beverages. The term can also apply to the periods in the histories of the countries during which the...
, which resulted in the creation of a black market for liquor.
Whether an economic shortage of a certain good or service is beneficial or detrimental to society often depends on one's ethical
Ethics
Ethics, also known as moral philosophy, is a branch of philosophy that addresses questions about morality—that is, concepts such as good and evil, right and wrong, virtue and vice, justice and crime, etc.Major branches of ethics include:...
and political
Politics
Politics is a process by which groups of people make collective decisions. The term is generally applied to the art or science of running governmental or state affairs, including behavior within civil governments, but also applies to institutions, fields, and special interest groups such as the...
views. For instance, consider the shortage of recreational drugs discussed above, and the controversies around the use of such drugs. Likewise, consider the economic shortage of cars in the Soviet Union during the 1980s: On the one hand, people had to wait in line to buy a new car; on the other hand, cars were more affordable than they would have been at market prices.
Shortages and "longages"
Garrett HardinGarrett Hardin
Garrett James Hardin was an American ecologist who warned of the dangers of overpopulation and whose concept of the tragedy of the commons brought attention to "the damage that innocent actions by individuals can inflict on the environment"...
emphasized that a shortage of supply can just as well be viewed as a "longage" of demand
Demand
- Economics :*Demand , the desire to own something and the ability to pay for it*Demand curve, a graphic representation of a demand schedule*Demand deposit, the money in checking accounts...
. For instance, a shortage of food can just as well be called a longage of people (overpopulation
Overpopulation
Overpopulation is a condition where an organism's numbers exceed the carrying capacity of its habitat. The term often refers to the relationship between the human population and its environment, the Earth...
). By looking at it from this view, he felt the problem could be better dealt with.
See also
- Shortage economyShortage economyShortage economy is a term coined by the Hungarian economist, János Kornai. He used this term to criticize the old centrally-planned economies of the communist states of the Eastern Bloc...
- ScarcityScarcityScarcity is the fundamental economic problem of having humans who have unlimited wants and needs in a world of limited resources. It states that society has insufficient productive resources to fulfill all human wants and needs. Alternatively, scarcity implies that not all of society's goals can be...
- Wood gas generatorWood gas generatorA wood gas generator is a gasification unit which converts timber or charcoal into wood gas, a syngas consisting of atmospheric nitrogen, carbon monoxide, hydrogen, traces of methane, and other gases, which - after cooling and filtering - can then be used to power an internal combustion engine or...
- False shortageFalse shortageA false shortage is a form of artificial scarcity induced by a supplier, often with the intent to elevate consumer demand above levels that may otherwise be achieved in the absence of such scarcity....