How does a shortage arise and how is it resolved in a market?

How does a shortage arise and how is it resolved in a market?

• A. Shortage arises when supply exceeds demand; price falls until equilibrium.
• B. Demand exceeds supply at a given price; price rises (or supply increases) until equilibrium is restored.
• C. Shortage arises when government imposes price floors; nothing changes.
• D. Shortage occurs when there is too much supply at the market price; price is set to zero.

Answer: (B)

A shortage happens when buyers want more of a good than sellers are willing to offer at the current price. At that price, quantity demanded exceeds quantity supplied, so the market signals that price should rise or more of the good should be produced. As the price rises, fewer people want to buy and more producers are willing to supply, so the gap shrinks until the quantity demanded equals the quantity supplied—the equilibrium. The option describes this process: demand exceeds supply at the current price; price rises (or supply increases) until equilibrium is restored. The other ideas mix up the signs or the mechanism: a shortage isn’t caused by too much supply, and letting the price fall would create a surplus. A government price floor above the market price can create a surplus rather than resolve a shortage, and saying a shortage happens when there’s too much supply at the market price isn’t consistent with how shortages arise.

A shortage happens when buyers want more of a good than sellers are willing to offer at the current price. At that price, quantity demanded exceeds quantity supplied, so the market signals that price should rise or more of the good should be produced. As the price rises, fewer people want to buy and more producers are willing to supply, so the gap shrinks until the quantity demanded equals the quantity supplied—the equilibrium. The option describes this process: demand exceeds supply at the current price; price rises (or supply increases) until equilibrium is restored.

The other ideas mix up the signs or the mechanism: a shortage isn’t caused by too much supply, and letting the price fall would create a surplus. A government price floor above the market price can create a surplus rather than resolve a shortage, and saying a shortage happens when there’s too much supply at the market price isn’t consistent with how shortages arise.