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Part I: The Nature of Managerial Economics A shortage exists when the quantity supplied of a good is less than the quantity demanded; in other words, not enough is being provided, and there is excess demand. Customers want to purchase more than businesses are providing. As a result, some customers who want to purchase the good can’t find it. The customers are left with two choices: Do without and be disappointed or offer a higher price to buy the good. At the same time, stores recognize that more customers want the good than they expected, so they raise the price. Suppose that the hot gift next Christmas is baseball cards of famous economists. (Yes, such things really exist, but bubble gum isn’t included.) As illustrated in Figure 2-7, at a price of $5.00 per set, the quantity supplied is 1,500 sets, while the quantity demanded is 5,000 sets. A shortage or excess demand of 3,500 sets exists. As the producer realizes the cards are selling out, the producer raises price to $10.00 per set, and some customers decide the cards are too expensive, so quantity demanded decreases to 3,000 sets. At the same time, the producer also increases production (there is a lot of money to be made in famous economist cards), so the quantity supplied increases to 3,000. The market has reached equilibrium, as illustrated in Figure 2-7, because the quantity demanded of 3,000 equals the quantity supplied. And this occurs at the equilibrium price of $10.00.
Figure 2-7: Shortage or excess demand.
Changing equilibrium: Shift happens Markets tend toward equilibrium, the price and quantity that correspond to the point where supply and demand intersect. But equilibrium itself can change.
