A shortage is the excess of quantity demanded over quantity supplied when the price is below equilibrium.

At $4 per book, readers demand 400 million books, but firms only print 200 million; a short­age of 200 million books annually is depicted in Figure 11. Publishers will try to satisfy unhappy, bookless customers who clamor for the limited quantities available by raising the price until the market clears; then books will be readily avail­able for the people most desperate to buy them. (Clearing occurs because quantity supplied rises as price rises while quantity demanded falls; they become equal at the equilibrium price.)

Equilibration is not instantaneous. Firms experiment with output prices in a process re­sembling an auction. Inventories vanishing from store shelves are signals that prices may be too low. Retailers will order more goods and, be­cause the market will bear it, may also raise prices. If retail orders grow rapidly, prices also tend to rise at the wholesale level, quickly elim­inating most shortages. People refer to tight markets, or sellers' markets, when shortages are widespread. Suppliers easily sell all they pro­duce, so quality may decline somewhat while sellers raise prices. Many sellers also exercise fa­voritism in deciding which customers to serve during shortages.

When prices exceed equilibrium, surpluses create buyers' markets and force sellers to con­sider price cuts. This is especially painful if pro­duction costs are resistant to downward pressures even though sales drop. (Most work­ers stubbornly oppose wage cuts.) In many cases, firms can shrink inventories and cut costs only by laying workers off and drastically reducing production. The price system ultimately forces prices down if there are continuing surpluses.

In 1776, Adam Smith described these types of self-corrections as the "invisible hand" of the marketplace. Price hikes eliminate shortages fairly rapidly, and price cuts eventually cure sur­pluses, but such automatic market adjustments may seem like slow torture to buyers and sell­ers. How rapidly markets adjust to changed cir­cumstances depends on (a) the quality of information and how widely and quickly the rel­evant information is disseminated, and (b) mar­ket structure—the vigor or lack of competition.

Evidence that adjustment processes may be long and traumatic includes huge losses by major firms and sluggish economies in many industrial states during the recession of 1990-1991. Contrary evidence includes rapid changes in the prices of stocks in response to changes in profits reported by major corporations. Different views about the speed of typical market mechanisms in the economy as a whole are central to debates be­tween modern advocates of various schools of macroeconomic thought. Most economists agree, however, that long-term shortages or surpluses are, almost without exception, consequences of governmental price controls.

Supplies and Demands Are Independent

Although specific demands and supplies jointly determine prices and quantities, it is important to realize that they are normally independent of each other, at least in the short run. Many peo­ple have difficulty with the idea that demands and supplies are independent. It would seem that demand depends on availability—or that supply depends on demand. The following ex­amples show that supplies and demands are nor­mally independent in the short run.

1. Suppose non-reusable "teleporter buttons" could instantly transport you anywhere you chose. Your demand price to go on the first, most valuable tour might be quite high, but it would decline steadily for subsequent journeys. Short shopping trips would be economical only if teleporters were very in­expensive. By asking how many buttons you would buy at various prices, we can con­struct your demand curve for such devices even though there is no supply.

2. Would you have made more mud pies when you were a kid if your parents had paid you a penny for each one? At two cents each, might you have hired playmates to help you? If mud pies sold for $1 each today, might you be a mud pie entrepreneur? Our point is that supply curves can be con­structed for mud pies even if there is no de­mand for them.

3. You might be willing to pay a little to hear some professors' lectures even if you did not receive college credit for gathering the pearls of wisdom they offer. Some professors, however, like to talk even more than you like to listen. A set of such demand and supply curves is illustrated in Figure 12. It is fortunate for both you and your profes­sors that your demands for their lectures are supplemented by contributions from taxpayers, alumni, and possibly your parents because only later and upon mature reflection will you realize how valuable those lectures really were.

We hope these examples convince you that specific supplies and demands are largely inde­pendent of each other and that they are rele­vant for markets only when they intersect at positive prices. Markets establish whether the in­terests of buyers from the demand side are com­patible with the interests of sellers from the supply side and then coordinate decisions where mutually beneficial exchange is possible. Keep this in mind as you study the applications of sup­ply and demand in the next chapter.

Ralph. T. Byrns, Gerald W. Stone

Ральф Т. Бернс, Джеральд В.Стоун

Lesson 7