What is a Shortage?

A shortage, in economic terms, is a condition where the quantity demanded is greater than the quantity supplied at the market price.

Key Takeaways

  • A shortage, in economic terms, is a condition where the quantity demanded is greater than the quantity supplied at the market price.
  • There are three main causes of shortage—increase in demand, decrease in supply, and government intervention.
  • Shortage should not be confused with "scarcity."

Understanding Shortages

In a normally functioning market, there is an equilibrium between the quantity demanded and quantity supplied at a price point dictated by market forces. A shortage is a situation in which demand for a product or service exceeds the available supply. When this occurs, the market is said to be in a state of disequilibrium. Usually, this condition is temporary as the product will be replenished and the market regains equilibrium. Shortage should not be confused with "scarcity," in that shortages are usually temporary and can be corrected, while scarcities tend to be systemic and cannot be replenished.

There are three main causes of shortage:

  1. Increase in demand (outward shift in demand curve): For example, a sudden heat wave leads to an unexpected demand for energy that cannot be met.
  2. Decrease in supply (inward shift in supply curve): For example, an unexpected freeze results in destruction of orange crop leading to a drastic reduction in the supply of orange juice.
  3. Government intervention: Shortages can also be the result of government-imposed price ceilings.

Possible causes of a shortage include miscalculation of demand by a company producing a good or service, resulting in the inability to keep up with demand, or government policies such as price fixing or rationing. Natural disasters that devastate the physical landscape of a region can also cause shortages of such essential products as food and housing, also leading to higher prices of those goods. Global consumer and business trends can also create commodities and labor shortages.

Shortages are quite common in command economies. This is where the government will not allow the free market to dictate the price of a commodity or service based on the forces of supply/demand. When this happens, an artificially high number of people may decide to purchase that item because of the low price. For example, if the government provides free doctor visits as part of a national healthcare plan, consumers may experience a shortage of doctor services. This is because people are more likely to visit a doctor when they no longer have to pay directly for the cost.

Shortage Examples

  • Cocoa Shortage: As of 2016, chocolate makers face a shortage of cocoa beans because of falling supplies of the raw commodity and increased demand for chocolate. In 2015, global demand for chocolate increased by 0.6% and rose to 7.1 million tons. However, production of cocoa from leading cocoa bean suppliers in areas such as Ghana and the Ivory Coast fell by 3.9%, and global supply of cocoa beans was just 4.1 million tons. A factor in the increased demand is that consumption of chocolate candy is on the rise in China and India. Overall, the demand for cocoa in Asia jumped by 5.9% in 2015. As a result, the price of cocoa in 2015 rose to over $3,000 per metric ton, the highest level since 2012. To reverse the cocoa shortage, leading chocolate producers, such as Nestle S.A., are partnering to educate West African cocoa farmers on best practices and techniques to boost their production.
  • Cybersecurity Job Shortage: Economic and technology trends can also create job market shortages when the need for workers with new skills rises. For example, the expansion of cloud computing in government and healthcare services has also created an increased risk of cybercriminal activity. Cybersecurity professionals are needed to keep business and government systems safe from ongoing hacker threats. There is, however, a shortage of workers with the skills needed to fill this career specialty. The U.S. Bureau of Labor Statistics (BLS) reports that there were 209,000 unfilled cybersecurity job openings in 2015. The BLS also projects that the demand for cybersecurity professionals will rise by 18% between 2014 and 2024.