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M04.L05 — Markets in Disequilibrium: Shortages and Surpluses

Module: Module 04 — Supply and Market Equilibrium Lesson: L05 of 06 Duration: ~30 minutes Level: Introductory Provenance: Principles of Microeconomics (Curtis and Irvine) | MIT OCW 14.01 Principles of Microeconomics

Learning Objective

Distinguish between shortages and surpluses in market disequilibrium

Price Controls and Disequilibrium

When prices are prevented from reaching equilibrium:

Shortage (excess demand): - Occurs when price is below equilibrium - Quantity demanded exceeds quantity supplied - Example: Sydney housing with rent controls

Surplus (excess supply): - Occurs when price is above equilibrium - Quantity supplied exceeds quantity demanded - Example: Australian milk before dairy deregulation

Worked Example

Australian Rental Market

  1. Equilibrium rent: $500/week for 100,000 properties
  2. Government caps rent at $400 → landlords supply 80,000
  3. At $400, demand is 120,000 → shortage of 40,000 properties
  4. Results: Waiting lists, black markets, reduced maintenance

Common Misconception

"Shortages mean there isn't enough of a product"

Shortages occur when quantity demanded exceeds supplied at a given price - the product exists but isn't accessible at that price.

Key Takeaways

  • Shortages occur below equilibrium price
  • Surpluses occur above equilibrium price
  • Both create market inefficiencies
  • Australian examples show policy impacts

Exam-Style Calculation Practice

Key technique: substitute the given price into both equations, then compare Q_D and Q_S

A positive result (Q_S > Q_D) = excess supply. A negative result (Q_D > Q_S) = excess demand.

Example: D = 80 − 4P and S = −10 + 2P. Current price = 17. - Q_D = 80 − 4(17) = 80 − 68 = 12 - Q_S = −10 + 2(17) = −10 + 34 = 24 - Excess supply = 24 − 12 = +12 units (surplus — write positive)

Equilibrium check: set D = S → 80 − 4P = −10 + 2P → 90 = 6P → P* = $15, Q* = 20 At P = 17 > P* = 15, so a surplus exists — consistent with our answer.

Example 2: D = 120 − 3P, S = 20 + P. Price = 10. - Q_D = 120 − 30 = 90; Q_S = 20 + 10 = 30 - Excess demand = 30 − 90 = −60 units (shortage — write negative)

Practice

  1. D = 100 − 5P, S = −20 + 3P. At P = 12, calculate the excess supply or demand (use + for surplus, − for shortage). Then find the equilibrium price.
  2. How do queues form in shortage situations?
  3. D = 60 − 2P, S = 10 + P. The government sets a price floor at P = 25. Calculate the size of the resulting surplus.

Further Resources

Provenance: Principles of Microeconomics (Curtis and Irvine) | MIT OCW 14.01 Principles of Microeconomics