4.2 : Surplus and Shortages

Market Equilibrium occurs when the quantity of goods or services supplied by producers equals the quantity consumers are willing to purchase at a specific price. This equilibrium represents a state of balance in the market. However, this delicate balance can be disrupted by changes in market conditions, leading to either shortages or surpluses.

Shortages happen when the quantity demanded outstrips the quantity supplied at current prices, leading to increased prices. An example is the often-seen rush for gasoline before a major storm, where demand spikes unexpectedly.

Surpluses occur when the quantity supplied exceeds the quantity demanded at current prices, causing prices to drop. Consider the example of smartphone manufacturers overestimating demand for a new model, resulting in excess inventory.

In shortages, producers raise prices and increase the quantity supplied, eventually lowering the quantity demanded to a balanced state. During surpluses, producers cut prices and reduce the quantity supplied, making the product more affordable and boosting demand until equilibrium is reached.

The law of supply and demand governs these adjustments, ensuring that markets self-regulate over time to restore balance.