Surpluses and Shortages

If a market is not in equilibrium a situation of a surplus or a shortage may exist. A surplus, also called excess supply, is the amount by which the quantity of a good offered for sale by producers in a market exceeds the quantity demanded by consumers. In addition, a surplus occurs at prices above the equilibrium price. A surplus may occur, for example, when the wheat harvest benefits from unusually good weather, so that production of bread flour increases while households continue to eat the same number of loaves of bread as before. Likewise, there may be a surplus of qualified architects if the number of students opting to take architecture degrees jumps at a time when the number of construction projects stays level.

A shortage, also called excess demand, is the amount by which the quantity of a good demanded by consumers is greater than the quantity supplied by producers and occurs when prices are below the equilibrium price. If a producer prices his vehicles at too low of a price and the quantity demanded exceeds the quantity supplied, a shortage is created.

When graphed, a surplus is shown at a price above the equilibrium price; the size of the surplus is equal to the quantity gap between the supply curve and demand curve at that price. A shortage can also be shown on a graph; its size is the quantity gap between the demand curve and supply curve at a price below the equilibrium price. Shortages and surpluses occur when the market is in disequilibrium, or when supply and demand do not meet at the same point and are off-balance. An example of this occurred in the early 2000s when impractical government economic decisions in Venezuela led to markets in disequilibrium and created food shortages. There is a natural tendency for markets to move from disequilibrium to equilibrium, provided other factors do not change (the ceteris paribus assumption). If the price of a good rises because of supply difficulties, the law of demand states that consumers will cut their purchases, while the law of supply states that producers will increase their output. Firms tend to have sales when they have surpluses, which increases the amount of quantity demanded through lower prices. As a result, the quantity demanded and the quantity supplied will converge toward the equilibrium point.