Shortage (Excess Demand)
What is Shortage (Excess Demand)?
A shortage occurs when quantity demanded exceeds quantity supplied at a given price.
A shortage, or excess demand, happens when consumers are willing to buy more than producers are willing to sell at the current price. This puts upward pressure on the price, as consumers compete to buy the scarce goods. The shortage will be eliminated as the price rises to the equilibrium level.
Shortage (Excess Demand): a worked example
A campus store prices its logo hoodie at $30. At that price 900 students want one while the store stocks 400, so the shortage is 900 - 400 = 500 hoodies. Excess demand is the horizontal gap between the two curves at the posted price, and it opens only because $30 sits below the equilibrium price. Now let the price move freely. At $40 quantity demanded falls to 700 and quantity supplied rises to 700, so the gap closes and the market clears. The 500 hoodie shortage disappeared from both sides at once: quantity demanded fell by 200 while quantity supplied rose by 300, and 200 + 300 = 500. At $30 only 400 hoodies change hands, and the students who get them are sorted by who queues first rather than by who values a hoodie most.
The mistake students make with shortage (excess demand)
Shortage gets used as a synonym for scarcity, and the two ideas are not the same. Scarcity is the permanent condition that wants exceed the resources available, and it never disappears for any economic good. A shortage is temporary and price specific: it exists at one price below equilibrium and vanishes once the price rises. Saying that oil is in shortage because supplies are finite confuses the two terms. Reserve the word shortage for a stated price that sits below the market clearing price.
Shortage (Excess Demand) questions
What causes a shortage?
A price sitting below the equilibrium price causes a shortage. At that low price buyers want a large quantity while sellers offer a small one, and the gap between the two is excess demand. The price is usually held down by a binding price ceiling, by a posted price a seller has not yet updated, or by a sudden jump in demand the market has not adjusted to.
What is the difference between a shortage and scarcity?
Scarcity is the permanent fact that human wants exceed the resources available to satisfy them, and it applies to every economic good at all times. A shortage is temporary and tied to one price: it exists when the price sits below equilibrium and disappears once the price is free to rise. Scarcity cannot be solved by any policy, while a shortage ends as soon as the price adjusts.
How does a shortage get eliminated?
Rising price closes the gap from both sides at once. As the price climbs, some buyers drop out and quantity demanded falls, while producers find the higher price worth serving and quantity supplied rises. The two movements meet at the equilibrium price, where the gap is exactly zero. When a law or a contract blocks the price from rising, the shortage persists and nonprice rationing takes over.
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Related terms
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