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.

Question

Is this true or false? And why?

In: Economics

Answer 1

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’.