Is price floor a shortage?
A price ceiling below the market price creates a shortage causing consumers to compete vigorously for the limited supply, limited because the quantity supplied declines with price. Likewise, since supply is proportional to price, a price floor creates excess supply if the legal price exceeds the market price.
So, price ceilings transfer some producer surplus to consumers—which helps to explain why consumers often favor them. Conversely, price floors transfer some consumer surplus to producers, which explains why producers often favor them.
A shortage exists if the quantity of a good or service demanded exceeds the quantity supplied at the current price; it causes upward pressure on price. An increase in demand, all other things unchanged, will cause the equilibrium price to rise; quantity supplied will increase.
The negative effects of price controls are many. By creating shortages, they often cause people to wait in line, they often cause the quality of products whose prices are controlled to fall, and they can lead to favoritism by suppliers. All those effects remain until the price controls are ended.
As we have already seen, a binding price floor raises the price of a good above the equilibrium price. This leads to a reduction in demand and an increase in supply. Quantity supplied will exceed the quantity demanded, which leads to a surplus of goods in the market.
A surplus exists when the price is above equilibrium, which encourages sellers to lower their prices to eliminate the surplus. A shortage will exist at any price below equilibrium, which leads to the price of the good increasing.
Key Takeaways. A shortage 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, as it is used in economics, should not be confused with "scarcity."
The equilibrium price is determined when the QD (quantity demanded) and QS (quantity supplied) are in equilibrium. At a price $4 per bushel the QD is 75. At $4, there is no excess or surplus, the production is enough to fulfill the demand.
A surplus exists when the price is above equilibrium, which encourages sellers to lower their prices to eliminate the surplus. A shortage will exist at any price below equilibrium, which leads to the price of the good increasing.
A binding price ceiling is set below the market price equilibrium causing a market shortage. On the other hand, a non-binding price ceiling will be set at the market price equilibrium or below which can cause a market surplus.