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

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.