Shortage

For the opposite, see: surplus (also called excess supply)

A 2014 image of product shortages in Venezuela.

In economics, a shortage or excess demand is when the demand for a product or service exceeds its supply in a market. It is the opposite of an excess supply (surplus).

Definitions

In a perfect market (one that matches a simple microeconomic model), an excess of demand will prompt sellers to increase prices until demand at that price matches the available supply - market equilibrium. In economic terminology, a shortage occurs when for some reason (such as government intervention, or decisions by buyers not to raise prices) the price does not rise to reach equilibrium. In this circumstance, there are more buyers at the market price than the quantity of the good or service that is available, and some non-price mechanism (such as "first come, first served" or a lottery) determines which buyers are served.

In common use, the term "shortage" may refer to a situation where most people are unable to find a desired good at an affordable price, especially where supply problems have increased the price. "Market clearing" happens when all buyers and sellers willing to transact at the equilibrium price are able to find partners. There are almost always willing buyers at a lower-than-market-clearing price; the narrower technical definition doesn't consider failure to serve this demand as a "shortage", even if it would be described that way in a social or political context (which the simple model of supply and demand does not attempt to encompass).

Causes

Shortages (in the technical sense) may be caused by:

• Price ceilings, a type of price control which involves a government-imposed limit on the price of a product service.
• Anti-price gouging laws.
• Government ban on the sale of a product or service, such as prostitution or certain recreational drugs.
• Decisions by suppliers not to raise prices, for example to maintain friendly relationships with potential future customers during a supply disruption.

Effects

Decisions which result in a below-market-clearing price help some people and hurt others. In this case, shortages may be accepted because they theoretically enable a certain portion of the population to purchase a product that they couldn't afford at the market-clearing price. The cost is to those who are willing to pay for a product and either can't, or experience greater difficulty in doing so.

In the case of government intervention in the market, there is always a trade-off with positive and negative effects. For example, a price ceiling may cause a shortage, but it will also enable a certain percentage of the population to purchase a product that they couldn't afford at market costs. Economic shortages caused by higher transaction costs and opportunity costs (e.g., in the form of lost time) also mean that the distribution process is wasteful. Both of these factors contribute to a decrease in aggregate wealth.

Shortages may cause:

• Black markets, illegal markets in which products that are unavailable in conventional markets are sold, or in which products with excess demand are sold at higher prices than in the conventional market.
• Artificial controls of demand, such as time (such as waiting in line) and rationing.
• Non-monetary bargaining methods, such as time (for example queuing), nepotism, or even violence.
• Price discrimination.
• The inability to purchase a product.

Examples

• Rationing in the United Kingdom occurred mainly during and after the world wars
• From 1920 to 1933 during prohibition in the United States, the creation of a black market for liquor was created due to the low supply of alcoholic beverages.
• During the 1973 oil crisis, during which long lines and rationing was used to control demand.
• In the former Soviet Union during the 1980s, prices were artificially low by fiat (i.e., high prices were outlawed). Soviet citizens waited in line (or "queued") for various price-controlled goods and services such as cars, apartments, or some types of clothing. From the point of view of those waiting in line, such goods were in perpetual "short supply"; some of them were willing and able to pay more than the official price ceiling, but were legally prohibited from doing so. This method for determining the allocation of goods in short supply is known as "rationing".
• From the mid-2000s through the 2010s, shortages in Venezuela occurred due to the Venezuelan government's economic policies;^[1] such as relying on foreign imports while creating strict foreign exchange controls, put price controls in place and having expropriations result with lower domestic production. As a result of such shortages, Venezuelans had to search for products, wait in lines for hours and rationing was initiated, with the government allowing the purchase of a certain amount of products through fingerprint recognition.^[2][3][4]

Whether an economic shortage of a certain good or service is beneficial or detrimental to society often depends on one's ethical and political views. For instance, consider the shortage of recreational drugs discussed above, and the controversies around the use of such drugs. Likewise, consider the economic shortage of cars in the Soviet Union during the 1980s: On the one hand, people had to wait in line to buy a new car; on the other hand, cars were more affordable than they would have been at market prices.

Shortages and "longages"

Garrett Hardin emphasised that a shortage of supply can just as well be viewed as a "longage" of demand. For instance, a shortage of food can just as well be called a longage of people (overpopulation). By looking at it from this view, he felt the problem could be better dealt with.^[5]

Labour shortage

In its narrowest definition, a labour shortage is an economic condition in which there are insufficient qualified candidates (employees) to fill the market-place demands for employment at any price. Such a condition is sometimes referred to by Economists as "an insufficiency in the labour force." An ageing population and a contracting workforce may curb U.S. economic expansion for several decades, for example.^[6]

Wage factors

Wage levels have been suggested as one way to measure a labour shortage. However, this often does not match people's common perceptions. For example, if wages alone are the best measure of labour shortages, then that would imply that we should be importing doctors instead of farm workers because doctors are far more expensive than farm workers. However, there are institutionally-imposed limits on the number of doctors that are allowed to be licensed. If foreign migrant workers were not allowed into a nation, then farm wages may go up, but probably not enough to approach the wages of doctors.

The Atlantic slave trade (which originated in the early 17th century but ended by the early 19th century) was said to have originated due to perceived shortages of agricultural labour in the Americas (particularly in the American South). As this was the only means of malaria resistance available at the time.^[7] Ironically malaria seems to itself have been introduced to the "New World" via the slave trade.^[8]

See also

• Aggregate demand
• Aggregate supply
• Aggregation problem
• Eastern Bloc economies
• Disequilibrium
• Economic surplus
• Effective demand
• Excess demand function
• Excess supply
• Induced demand
• Keynesian formula
• Reproduction
• Scarcity
• Shortage economy
• Supply shock

References

• Kornai, János, Socialist economy, Princeton University Press, 1992, ISBN 0-691-00393-9
• Kornai, János, Economics of Shortage, Amsterdam: North Holland Press, Volume A, p. 27; Volume B, p. 196 .
• Gomulka, Stanislaw: Kornai's Soft Budget Constraint and the Shortage Phenomenon: A Criticism and Restatement, in: Economics of Planning, Vol. 19. 1985. No. 1.
• Planning Shortage and Transformation. Essays in Honor of Janos Kornai, Cambridge, Mass.: MIT Press, 2000
• Myant, Martin; Drahokoupil, Jan (2010), Transition Economies: Political Economy in Russia, Eastern Europe, and Central Asia, Wiley-Blackwell, ISBN 978-0-470-59619-7 

External links

Look up shortage in Wiktionary, the free dictionary.

• János Kornai Home Page at Harvard University
• János Kornai Home Page at Collegium Budapest
• Part 1 and Part 2 of COMPARING AND ASSESSING ECONOMIC SYSTEMS, Shortage and Inflation: The Phenomenon, PPT (PowerPoint file presentation) at West Virginia University
• János Kornai 'The Soft Budget Constraint'
• David Lipton and Jeffrey Sachs 'The Consequences of Central Planning in Eastern Europe'
• On overview and critique of Kornai's account can be found in Myant, Martin; Jan Drahokoupil (2010). Transition Economies: Political Economy in Russia, Eastern Europe, and Central Asia. Hoboken, New Jersey: Wiley-Blackwell. pp. 19–23. ISBN 978-0-470-59619-7. 
• Planning For The Looming Labor Shortage - A Supply Chain Perspective by HK Systems
• "America's New Immigrant Entrepreneurs" - A Duke University Study
• Criticism of high-tech shortage claims
• Disputation of High-tech Labor Shortage by Dr. Matloff
• RAND Study on Alleged Shortage of Scientists
• Shortage of skilled workers knocks red tape off top of business constraints league table - Grant Thornton IBR
• The Real Science Gap - "It's not insufficient schooling or a shortage of scientists. It’s a lack of job opportunities."