Shortages, Surpluses and Shifting Supply and Demand

A new sneaker drops at $120 and sells out in four minutes. That night, pairs resell online for $250. In the same store, last year's model sits at 40% off. Nobody passed a law about either price. So what moved them? This is Module 2.7, Market Disequilibrium and Changing Market Conditions. You'll also learn the one question where the right answer is "can't tell."

Equilibrium is the price where quantity demanded equals quantity supplied. At any other price, the market is in disequilibrium: out of balance. Take strawberries at a farmers market. At $6 a box, buyers want 500 boxes and growers bring 500. That's equilibrium.

Quick refresher: equilibrium is where the curves cross. From that point, run dotted lines straight across to the price axis and straight down to the quantity axis: here, $6 and 500 boxes.

Now say growers charge $8. Buyers want only 300 boxes, but growers bring 700. When quantity supplied is bigger than quantity demanded, that's a surplus, or excess supply: 700 minus 300 is 400 unsold boxes. Growers stuck with boxes cut their price. As it falls, buyers want more and growers bring fewer, until the gap closes at $6.

So what just happened at $8? One: the price sat above equilibrium. Two: growers brought 700 boxes and buyers wanted 300, a surplus of 400. Three: growers cut the price until the gap closed at $6.

Last module's smoothie market at $6: quantity supplied 450, quantity demanded 250, a surplus of 200. Its price falls too.

Now the opposite. At $5, buyers want 600 boxes, but growers bring only 400. When quantity demanded is bigger than quantity supplied, that's a shortage, or excess demand: 600 minus 400 is 200 boxes short. Buyers who miss out offer more, so the price climbs back to $6. That's the sneaker: a shortage at $120, so resale prices rose. Last year's model had a surplus, so its price fell.

So what just happened at $5? One: the price sat below equilibrium. Two: buyers wanted 600 and growers brought 400, a shortage of 200. Three: buyers bid the price back up to $6. The sneaker at $120 was the same story.

Exam trap: measure the gap between the curves at that one price. At $8, that's 700 minus 300, not 700 minus the equilibrium 500. And say it with quantities: quantity supplied is greater than quantity demanded, never "supply is greater than demand."

Now a curve shifts. A video makes strawberry smoothies popular. Tastes changed, so demand shifts right: 200 more boxes at every price.

Quick refresher: a change in anything except the good's own price, like tastes, shifts the whole curve: a change in demand. A change in the good's own price only moves us along the curve: a change in quantity demanded.

At the old $6 price, buyers now want 700, but growers bring 500: a shortage of 200. The price rises until the market clears at $7 and 600 boxes. On a graph: label the new curve D2, add an arrow, and put P2 and Q2 on the axes with dotted lines. Rule: when demand increases, price and quantity both rise; when it decreases, both fall. Same direction. Exam trap: the price rose, so did supply increase? No.

Growers moved up along the same supply curve, from 500 to 600 boxes. That's an increase in quantity supplied, not in supply.

So what just happened when the video spread? One: demand shifted right by 200 boxes. Two: at $6, that made a shortage of 200. Three: the price rose to $7, and growers moved along the same supply curve to 600 boxes.

Producer surplus changes too: it's the triangle under the price and above supply, which here starts at $1.

Quick refresher: a triangle's area is one half times base times height. The base is the quantity along the bottom; the height is the price minus where supply starts.

Before: one half times 500 times the gap ($6 minus $1), or $1,250. After: one half times 600 times ($7 minus $1), or $1,800. Growers gain $550. Buyers' surplus grows here too, so total surplus in this market rises.

So what just happened to producer surplus? One: the price rose from $6 to $7, so the triangle got taller. Two: it got wider, from 500 to 600 boxes. Three: its area grew from $1,250 to $1,800, a $550 gain for growers.

Now shift supply. A picking machine cuts costs, or more growers join the market: either way, supply shifts right. That makes a surplus at the old price, so price falls and quantity rises. A frost decreases supply, shifting it left: higher price, lower quantity. Supply shifts move price and quantity opposite ways.

So what just happened with supply? One: an increase in supply made a surplus at the old price, so price fell and quantity rose. Two: a decrease in supply made a shortage, so price rose and quantity fell. Three: price and quantity moved opposite ways.

How far each moves depends on elasticity. If supply decreases against inelastic demand, drawn steep, price jumps and quantity barely drops. Against elastic demand, drawn flat, price rises a little and quantity drops a lot.

Quick refresher: elasticity is the percent change in quantity over the percent change in price. If price rises 10% and quantity falls only 2%, that's 2 over 10, or 0.2, ignoring the minus sign: below 1, so inelastic. Quantity barely responds, which is why inelastic demand is drawn steep.

Same with supply: when demand increases against steep, inelastic supply, price jumps and quantity barely grows.

Now the trickiest part: both curves shift at once. Say the video and the picking machine hit the same week. The method: take one shift at a time and write arrows. Demand increases: price up, quantity up. Supply increases, shifting right: price down, quantity up. Quantity has two up arrows, so it rises for sure. Price has one up and one down, so it depends on which shift is bigger. The question didn't say, so price is indeterminate.

So what just happened with two shifts? One: both shifts pushed quantity up, so quantity rises for sure. Two: they pushed price opposite ways. Three: without their sizes, the price change is indeterminate.

Run all four combinations. Both increase: quantity rises, price indeterminate. Both decrease: quantity falls, price indeterminate. Demand increases, supply decreases: price rises, quantity indeterminate. Demand decreases, supply increases: price falls, quantity indeterminate. Shortcut: both curves increase, or both decrease? You know quantity. One increases, one decreases? You know price. The other is always "can't tell." Exam trap: don't trust one sketch. Drawing both shifts, you pick their sizes by accident, so your graph shows an answer nobody gave.

No sizes given? Pick "indeterminate" or "may rise, fall, or stay the same."

Quick check. Bike helmets sell for $30. At that price, buyers want 800 and sellers offer 500. Which is true? A) Surplus of 300; price falls. B) Shortage of 300; price rises. C) Shortage of 300; supply shifts right. D) Shortage of 1,300; price rises.

B. Quantity demanded beats quantity supplied by 300, so it's a shortage, and the price rises. C is the trap: a higher price moves sellers along their supply curve. The curve itself doesn't shift.

A health report makes oat milk more popular, and a new machine cuts the cost of making it. What happens to its equilibrium price and quantity? A) Both rise. B) Price falls, quantity rises. C) Quantity rises, price is indeterminate. D) Price rises, quantity is indeterminate.

C. Both shifts push quantity up. But demand pushes price up and supply pushes it down, and we don't know which is bigger. The traps are B and A: each one guesses a size the question never gave.

Recap: above equilibrium, surplus; below, shortage; price moves to close the gap. Demand shifts move price and quantity the same way, supply shifts opposite ways. Both shift? One is indeterminate. Next: Module 2.8A, Government Intervention: Taxes, Subsidies, and Market Efficiency.