What is the term for the situation where demand exceeds supply in a market?
Show answer & explanation
Correct answer: C
Explanation
Correct Answer
Shortage
Explanation
A shortage, also known as excess demand, occurs in a market when the quantity demanded of a good or service exceeds the quantity supplied at the current market price. This scenario typically happens when the market price is set below the equilibrium price, causing consumers to want to buy more units than producers are willing or able to offer.
Over time, a shortage exerts upward pressure on prices. As consumers compete for the limited available goods, they bid up the price. As the price rises, producers are incentivized to supply more, and some consumers drop out of the market, eventually driving the market back toward equilibrium.
The other options represent different market conditions:
Surplus (Excess Supply) occurs when the quantity supplied exceeds the quantity demanded, usually because the price is set above equilibrium.
Equilibrium is the state where quantity demanded exactly equals quantity supplied, and the market price remains stable.
Deflation is a general, sustained decrease in the overall price level of goods and services across an entire economy, rather than a condition of an individual product market.
Key Points
Price Mechanism: A shortage causes market prices to increase until the quantity demanded aligns with the quantity supplied.
Government Intervention: Shortages are often prolonged by government-imposed price ceilings (maximum legal prices set below the market equilibrium, such as rent controls), which prevent prices from adjusting naturally.
Market Force: A shortage occurs when Quantity Demanded is greater than Quantity Supplied.
Important Questions and Answers
Question: What is the economic term for a situation where a government mandates a maximum legal price that results in a persistent market shortage?
Answer: Price Ceiling.
Question: How does a free market naturally eliminate a shortage without external intervention?
Answer: Through the price mechanism, where competition among buyers bids the market price upward until equilibrium is restored.