Grade 7

Intermediate

7 min

Lesson 8 of 12

Surplus and Shortage

Not Started

Analyzing what happens when the market price is too high or too low.

Why do some sneakers sell out in seconds while others sit on clearance racks for months with '50% OFF' stickers?

Learning Objectives

1.Identify a surplus when the market price is above the equilibrium point
2.Identify a shortage when the market price is below the equilibrium point
3.Explain how market forces push prices back toward the 'sweet spot' of equilibrium

The 'Too High' Problem: Surplus

In a perfect market, the price settles where the amount buyers want equals the amount sellers provide. But what if the price is set too high? This creates a surplus (also called excess supply). At a high price, producers want to sell a lot (

Q_s

), but consumers only want to buy a little (

Q_d

). Mathematically, a surplus occurs when:

Q_s > Q_d

Because items are sitting on shelves collecting dust, sellers get nervous. To get rid of the extra inventory, they must lower the price. As the price drops, more people want to buy, and the surplus eventually disappears.

Imagine a cafeteria sells pizza slices for

10 each. 1. At this high price, the kitchen makes 100 slices (

Q_s = 100

). 2. Only 20 students are willing to pay that much (

Q_d = 20$). 3. The surplus is calculated as:

100 - 20 = 80 \text{ slices}

4. To sell the remaining 80 slices before they go bad, the cafeteria must lower the price.

Quick Check

If a store has a surplus of video games, will they likely raise or lower the price to fix the problem?

Think about what happens during a 'Clearance Sale.'

Answer

They will lower the price to encourage more people to buy the extra inventory.

The 'Too Low' Problem: Shortage

Now imagine the price is set way too low. This creates a shortage (excess demand). At a low price, everyone wants the product (

Q_d

), but sellers don't find it profitable to make very many (

Q_s

). This is represented by:

Q_d > Q_s

When there is a shortage, you see long lines, empty shelves, and 'Sold Out' signs. Because there are more buyers than products, buyers may even start 'bidding up' the price. Sellers realize they can charge more and still sell out, so the price begins to rise back toward equilibrium.

A popular band decides to sell concert tickets for only

1. 1. 50,000 fans want to go (

Q_d = 50,000

). 2. The stadium only has 5,000 seats (

Q_s = 5,000$). 3. The shortage is:

50,000 - 5,000 = 45,000 \text{ tickets}

4. Because demand is so high, people will start reselling tickets for much higher prices, pushing the market price upward.

Quick Check

In a shortage, is the Quantity Demanded ( $Q_d$ ) higher or lower than the Quantity Supplied ( $Q_s$ )?

A shortage means there isn't enough to go around.

Answer

Quantity Demanded ( $Q_d$ ) is higher than Quantity Supplied ( $Q_s$ ).

The Invisible Hand: Returning to Balance

Markets are like a self-correcting scale. If there is a surplus, the 'downward pressure' on prices moves the market back to equilibrium. If there is a shortage, the 'upward pressure' from eager buyers moves the price back up. This movement continues until $Q_s = Q_d$ . At this point, there is no pressure for the price to change. Economists call this the Equilibrium Price. It is the only price where both buyers and sellers are satisfied with the quantity being traded.

A shoe company is trying to find the right price for a new sneaker. 1. At $100, they have a surplus of 200 pairs. 2. At$ 40, they have a shortage of 300 pairs. 3. The company tries $70. At this price, they make 500 pairs and exactly 500 people want to buy them. 4. Since$ Q_s = Q_d $, the equilibrium price is$ 70. No further price changes are needed.

Key Takeaways

1A surplus occurs when Price is above equilibrium ( $Q_s > Q_d$ ), leading to lower prices.
2A shortage occurs when Price is below equilibrium ( $Q_d > Q_s$ ), leading to higher prices.
3The market naturally moves toward equilibrium where Quantity Supplied equals Quantity Demanded.
4Price acts as a signal to both buyers and sellers to adjust their behavior.

Quick Check

Multiple Choice

What is the result when $Q_s = 150$ and $Q_d = 100$ ?

Multiple Choice

If you see a 'Sold Out' sign at a store, the market is likely experiencing:

True/False

In a surplus, sellers will usually raise prices to make more money from the few customers they have.

What's Next?

Review Tomorrow

In 24 hours, try to explain to a friend why a 'Clearance Sale' is a sign of a market surplus.

Practice Activity

Next time you go to a store, look for a product that is out of stock. Ask yourself: Is the price currently too high or too low for equilibrium?

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Surplus and Shortage

Learning Objectives

The 'Too High' Problem: Surplus

The 'Too Low' Problem: Shortage

The Invisible Hand: Returning to Balance

Key Takeaways

Quick Check

What's Next?

Surplus and Shortage

Learning Objectives

The 'Too High' Problem: Surplus

The 'Too Low' Problem: Shortage

The Invisible Hand: Returning to Balance

Key Takeaways

Quick Check

What's Next?