[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

to illustrate the market’s failure to work in fact often underscore most forcefully the
importance of the law of supply and demand. The problem is that the “going price”
is not the market equilibrium price.
Shortages and surpluses can be seen in the standard supply and demand diagrams
shown in Figure 4.9. In both panels A and B, the market equilibrium price is
p*. In panel A, the going price, p 1 , is below p*. At this price, demand exceeds supply;
you can see this by reading down to the horizontal axis. Demand is Q d ; supply is Q s .
The gap between the two points is the “shortage.” The shortage forces consumers
to scramble to get the limited supply available at the going price.
In panel B, the going price, p 1 , is above p*. At this price, demand is less than
supply. Again we denote the demand by Q d and the supply by Q s . There is a surplus
in the market of Q s − Q d . Now sellers are scrambling to find buyers.
At various times and for various goods, markets have not cleared. There have
been shortages of apartments in New York; farm surpluses have plagued both
western Europe and the United States; in 1973, a shortage of gasoline led to cars
waiting in long lines at U.S. gas stations. Unemployment is a type of surplus, when
people who want to work find that they cannot sell their labor services at the
going wage.
In some markets, like the markets for agricultural goods, the adjustment of prices
to shifts in the demand and supply curves tends to be very rapid. In other cases,
such as in the housing market, the adjustments tend to be sluggish. When price
adjustments are sluggish, shortages or surpluses may appear as prices adjust. Houses
tend not to sell quickly, for instance, during periods of decreased demand, as that lower
demand translates only slowly into lower housing prices.
A
Supply
curve
B
Supply
curve
PRICE (p)
p*
p 1
Demand
curve
PRICE (p)
p 1
p*
Demand
curve
Shortage
Surplus
Q s
QUANTITY (Q )
Q d
Q d
Q s
QUANTITY (Q )
Figure 4.9
SHORTAGES AND SURPLUSES
In panel A, the actual price p 1 is below the market-clearing price p*. At a price of p 1 ,
quantity demanded exceeds quantity supplied, and a shortage exists. In panel B, the
actual price p 1 is above the equilibrium price of p*. In this case, quantity supplied
exceeds quantity demanded, and there is a surplus, or glut, in the market.
SHORTAGES AND SURPLUSES ∂ 89