According to standard economic theory, shortages only happen when pricing mechanisms fail.
If prices rise, then demand would lower and shortage will be resolved (?)..
Economically speaking, if the market is allowed to set the price, then shortages don't exist - the supply and demand curves cross. For example, if there were only 10 box folders in the world, you could get one if you were willing to pay more than about anyone else, hence no shortage.
But from a pragmatic point of view, if the price is higher than you can reasonably afford to pay, then there's a shortage.
The price mechanism is even more important in these cases though. Preventing it from adequately responding to changes in supply and demand only causes more shortages.
Right. On a market with free pricing "shortages" manifests as raised prices. Which serve as a signal to increase supply, providing a self healing mechanism.
The type of shortages where buyers have to wait in line, are picked by lottery etc, only appear when prices are fixed.
A shortage occurs whenever quantity demanded is greater than quantity supply at the market price. More people are willing and able to buy the good at the current price than what is currently available. When a shortage exists, the market is in disequilibrium.
Over time, the good will be replenished and the shortage condition resolved.
In that case the price could rise, but does not need to as the market is sufficiently supplied at a lower price point.
A shortage occurs when buyers want to pay more, and need to pay more for the market to clear, but cannot do so for some reason (the law, for example). A decent indicator of there being a shortage is if the recipient of a product or service is determined by a non-price based mechanism, such as a lottery or a needs-based determination, as the usual 'highest bidder wins' method is not possible.
Not always. Some regulations set price ceilings, which is essentially sets a lower prices than the market rate. This leads to shortages, of course, but it is the obvious counter example.
It is a shortage until prices rise, quantity demanded goes down, quantity supplied goes up and a new equilibrium is attained. This might take a few minutes, or even milliseconds, or it might take many months, or it might never happen.
In capitalism there is a very simple solution for shortages: price increases. People still haven't realized that the solution is just to increase prices until only enough people afford the products, so there won't be shortages anymore.
> If there was a shortage, the price of labor (wages) would increase.
If price of labour was increasing, that would suggest that there isn't a shortage[1].
"In economic terminology, a shortage occurs when for some reason (such as government intervention, or decisions by sellers not to raise prices) the price does not rise to reach equilibrium. In this circumstance, buyers want to purchase more 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."
What I believe you are saying is that we have reached equilibrium, so there is no pressure to push prices up or down when measured across the population as a whole (individuals may still see increases and decreases).
> Isn't a shortage technically defined as when supply can't meet demand?
It is, yes, and ultimately says the same thing. I prefer the alternative phrasing as I think it more clearly explains the mechanisms, especially when people sometimes confuse demand to mean 'I want something'.
> Capped prices is one potential cause, but demand also isn't always very elastic and this can cause shortages on it's own.
I don't see it being contradictory. In an ideal model of inelastic demand, the demand never wanes no matter how high the price goes. However, price cannot continue to rise infinitely, so you have technically created a situation where price cannot rise again. It is still the price not being able to rise that characterizes the shortage in this case.
I did not mean to suggest that the government is the only thing that can cause prices to stop increasing. It was just one example.
People only don't sell things when the prices go up if they expect them to go up even more. That doesn't apply to temporary shortages at all. Either the demand will fall off over time or manufacturing will catch up to the demand, either of which causes the prices to decrease over time. Anybody who wants to profit from a shortage has to do it while there is still a shortage.
Note that your example of a famine brings up 'shortage' before any mention of prices. There are multiple ideas of shortage at play.
At the most basic level shortage can mean that there is not enough of a good/service for everyone to have it at any price (food in a famine, medicine in a pandemic).
Typically we apply shortage to situations where the supply and demand curves reach some hard stop at the edges (elasticity goes to 0).
In the case of normal market dynamics where supply and demand are both reasonably elastic then there really are no shortages per say - just cheapskates.
Indeed, if the demand exceeds the supply then the prices have to go up. This way more money will be available for the manufacturer to increase the supply. This is the basic law of economics, and anybody trying to play games around it will only make things worse and end up in poverty.
> A shortage, by definition, requires a situation where the price cannot rise.
This is not correct. A shortage is a situation where demand exceeds supply. The only definite statement you can make about such a situation is that it means the market in question cannot be in equilibrium. But there are multiple possible reasons for that. Prices being controlled is actually not one of them: the effect of price controls will not be market disequilibrium but a shifting of the equilibrium.
So the question you should actually be asking is, what is preventing the market from reaching equilibrium? Here are two possible answers:
- Demand is growing faster than supply can keep up.
- Transaction costs (for example, difficulties in employers evaluating candidates' actual potential) are preventing efficient matching of supply to demand.
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