Lesson preview · Prices, shortages and surpluses
Equilibrium, shortages and surpluses
~7 min · Free to read
Picture two scenes. A singer’s tour sells out in ten minutes at 60 dollars a ticket. By evening, fans are paying 250 dollars for the same seats on resale sites. Across town, a shop with racks of unsold winter coats cuts them to half price.
The tickets were priced too low, and the coats too high. Compared with what?
Now take a town’s croissant market. The table shows the quantity demanded at each price (how many croissants buyers want to buy). It also shows the quantity supplied (how many the bakeries want to sell).
| Price of a croissant (dollars) | Quantity demanded (dozen) | Quantity supplied (dozen) |
|---|---|---|
| 2 | 16 | 8 |
| 3 | 14 | 10 |
| 4 | 12 | 12 |
| 5 | 10 | 14 |
| 6 | 8 | 16 |
As the price rises, buyers want fewer and the bakeries offer more.
Look for the row where the two numbers match: 4 dollars, with 12 dozen each. (A dozen is 12.)
Key Term
Equilibrium
Equilibrium means balance: the point where quantity demanded equals quantity supplied, so nothing pushes the price up or down. Here the equilibrium price is 4 dollars and the equilibrium quantity is 12 dozen. On a graph, it’s where the demand and supply lines cross.
At that price the market clears: every croissant baked is sold, and everyone who wants one at 4 dollars gets one.
Any other price leaves a gap:
- Too low: a shortage. At 2 dollars, buyers want 16 dozen but the bakeries bake only 8. A shortage means buyers want more than sellers offer. Expect queues, sell-outs that leave buyers empty-handed, and resale at a markup (above the original price), like the singer’s tickets.
- Too high: a surplus. At 6 dollars, the bakeries bake 16 dozen but buyers want only 8. A surplus means sellers offer more than buyers want. Expect unsold stock, like the shop’s coats.
So the further below equilibrium a price sits, the bigger the shortage.
But the gap shrinks if the price can move. Bakeries that sell out early raise their price. At 3 dollars, buyers want 14 dozen and the bakeries offer 10: a shortage of 4, not 8.
Above equilibrium it works the other way: the higher the price, the bigger the surplus.
Bakeries left with unsold croissants cut their price. Either way, the price heads back towards 4 dollars, the one price with no gap.
Trap · Common Misconception
No one sets the equilibrium, and it doesn't mean "fair"
No single bakery, buyer or government picks 4 dollars. Each bakery sets its own price, but one that sells out early raises it, and one with leftovers cuts it. Prices settle where buyers’ and sellers’ plans match. (A price set by law is a price control, and it needn’t be the equilibrium.)
Equilibrium doesn’t mean fair or cheap, either. It describes where plans match, not what anyone deserves. If croissants became more popular, the equilibrium price would rise.
Trap · Common Misconception
Rising prices in a shortage aren't just greed
It’s tempting to blame greedy sellers when prices jump in a shortage. But sellers wanted money last week too, at the lower price. What changed is the gap. The higher price rations the croissants (shares them out) to the buyers willing and able to pay most, not whoever queues first. It also makes baking more worthwhile. Whether that’s fair is a separate question.
Check yourself · no marks
Look back at the croissant table. At 5 dollars, is there a shortage or a surplus, and how big is it? Which way will the price move?
Commit to one first. Guessing and being wrong beats reading the answer cold.
Practice · 1 / 5
Here is a town’s market for second-hand bikes:
| Price of a bike | Bikes buyers want | Bikes sellers offer |
|---|---|---|
| 40 dollars | 50 | 10 |
| 60 dollars | 40 | 20 |
| 80 dollars | 30 | 30 |
| 100 dollars | 20 | 40 |
What are the equilibrium price and quantity?
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