When there is a shortage of a good, consumers eventually give up trying to buy, so the demand for the good declines, and the price falls until the market is finally in equilibrium.

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Is this true or false? And why?

In: Economics

well, if the supply cant match the demand then people have to go without, and the more they realize you cant get the required goods, then the interest for it goes down in favor of alternatives.

if there are no alternatives then the prices remain high until supply can match,this is a problem if companies try to abuse this; ie: a good they know people HAVE to get, this is called an “artificial shortage” and in most cases if proven can be a legal suicide for the companies responsible.

In a free market without restrictions, when demand outpaces supply, the price will increase. As the price increases, people will stop buying at varying price points.

For example, let’s imagine a gasoline pipeline on the east coast gets shut down by Russian hackers. As gas stations begin to run low on fuel, they drive up the price to $20/gallon. Now a lot of people will say “fuck that” and stay home. But there will be people that pay that. Then the price continues upward to $100/gallon and even more people will stop driving.
Then the tanker truck comes to refill all the gas stations in the city. Competition continues, driving the price back down.

We saw a great example of this at the onset of the pandemic last year, people hoarding and selling hand sanitizer for ridiculous prices.

It may fall from the peak and land on a new equilibrium higher than old price but lower than peak.

Say a used car that would’ve sold for $8k last year is now selling for $10k due to shortage of used cars. Enough people decide to keep their car for now, maybe dealer eventually drops price to $9k before it sells.

This depends on the elasticity of the good and substitutes for said good.

Elasticity refers to how demand adjusts relative to a good’s price. Generally, you’d expect as price goes up, demand goes down. But that’s not always true, you get some goods where as it becomes more expensive, it becomes more desirable (see things like expensive artworks etc).

Substitutes refers to goods that can be replaced with other goods due to similarity (so 30% cocoa chocolate and 50% cocoa chocolate as a poor example). The relevant point in the above example is for cases where substitutes are NOT available. For example, only one company sells cars. If everybody needs cars then they’ll buy them even if the price is ‘unfair’.