Shortage

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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[edit]

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[edit]

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[edit]

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[edit]

  • 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; 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.[1][2][3]

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"[edit]

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.[4]

Shortage economy[edit]

Shortage economy (Polish: gospodarka niedoboru, Hungarian: hiánygazdaság, German: Mangelwirtschaft) is a term coined by the Hungarian economist János Kornai. He used this term to criticise the old centrally-planned economies of the communist states of the Eastern Bloc. In his article Economics of Shortage (1980), János Kornai argued that the chronic shortages seen throughout Central and Eastern Europe in the late 1970s (and which continued during the 1980s) were not the consequences of planners' errors or the wrong prices, but rather systemic flaws.

A shortage of a certain item does not necessarily mean that the item is not being produced; rather, it means that the amount of the good demanded exceeds the amount supplied at a given price (see supply and demand). This may be caused by a government enforced low price which encourages consumers to demand a higher amount than is supplied. Kornai, however, concentrated on the role of reduced supply, and argued that this was the underlying cause of Eastern European shortages during the 1980s.

A queue in front of a shop – a common sight in the People's Republic of Poland during the 1980s.

According to Kornai, shortage economies share several common characteristics. They all experience frequent, intensive and chronic shortages. These are general in nature; that is, they occur in all spheres of the economy (consumer goods and services, means of production and producer goods). The shortages are both horizontal and vertical which means that they affect both the supply of intermediate goods as well as related complementary goods. Furthermore, the shortages are occasionally replaced by situations of surplus "slack" when too much of a particular good is supplied (often due to the mistiming of production orders which arrive too late).

Buyers' actions[edit]

Kornai distinguishes between several different possible actions and individual outcomes that can occur in a shortage economy. It could happen that the item sought by the consumer is available in the shop. But there may be a limited amount of a sought-after good available, which means that consumers have to queue for it (theoretically, in a market economy such a situation would generally, but not always, be eliminated by price adjustments). Queueing involves a considerable cost in terms of time spent in the queue for consumers. In the economies which Kornai studied, this could have involved several hours a day spent in queues just to obtain basic products like food. Other consumer goods had explicit waiting lists for which potential buyers had to sign up months or even years in advance. An example is the wait in the 1980s Soviet Union for the right to purchase an apartment which could take as long as ten or fifteen years. In a market economy this problem would have been resolved by price adjustments.

Another possible situation is that the item is simply not available. In that case the buyer can either abandon the intent of purchase completely, spend additional time (an implicit economic cost) in further search for the good, or purchase a substitute good. According to Kornai the purchase of a substitute is compulsory. Finally, it is possible that the consumer ends up purchasing a completely unrelated good, due to the income effect, simply in the hope that selling the unneeded item later will enable her to purchase the actual good she is seeking at a future time. This has the effect of increasing demand for other goods, simply because they are there, and can lead to the spread of shortages throughout the economy.

Labour shortage[edit]

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.[5]

Wage factors[edit]

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 licenced.[citation needed] 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.[6] Ironically malaria seems to itself have been introduced to the "New World" via the slave trade.[7]

See also[edit]

References[edit]

  • 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[edit]