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Shortages Are Plaguing the American Economy

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In San Francisco shops are running out of paper products and food. In Dallas builders report a scarcity of windows, bricks and appliances. In Chicago manufacturers say they are short of aluminum, steel, copper, plastics, paints, pallets, paper, glue and microchips.—The Economist

How did the quantity and price of microchips change in 2021? Which had the larger percentage change?

This data table provides an answer.

Both the quantity and price of microchips increased in 2021. The quantity increased by 13 percent and the price rose by 8.5 percent, so the quantity had the larger percentage increase.

How does a shortage arise in a market and how is it eliminated?

A shortage arises in a market when demand increases or supply decreases and the price has not risen by enough to restore market equilibrium. When a shortage arises, buyers are willing to pay a higher price than sellers are willing to accept, so the price rises and eliminates the shortage.

Is the outcome in a market efficient when there is a shortage?

The following figure answers this question.

Is the outcome in a market efficient when a shortage is eliminated?

The following figure answers this question.

Work these questions to check your understanding and get instant feedback.

Answer the following questions to check your understanding of the story.

In 2021, the market for steel was in equilibrium. In 2022, the demand increases and the supply does not change. How does a shortage arise, and how is it eliminated?

At the 2021 price, a shortage arises because the quantity demanded _______________ the quantity supplied. The price _______________ and eliminates the shortage.

A shortage does not arise when the quantity demanded is less than the quantity supplied.

If the price fell, the difference between the price the buyers are willing to pay and the price the sellers are willing to accept would increase, and the shortage would grow.

When a shortage arises, buyers are willing to pay a higher price than sellers are willing to accept. The price rises and eliminates the shortage.

Is the outcome in a market efficient when there is a shortage?

When there is a shortage, marginal social benefit ____________ marginal social cost, so the outcome in the market is _____________.

When MSB = MSC, the outcome in the market is efficient.

When MSB > MSC, the outcome in the market is inefficient.

When there is a shortage, buyers are willing to spend more than sellers are willing to accept, so MSB ≠ MSC.

When there is a shortage, MSB > MSC, so the outcome in the market is inefficient.

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