What is Market Surplus and Market Shortage?

In everyday language, a “surplus” indicates that there is an excess of something, while a “shortage” means that there is a scarcity of it. In economics, “market surplus” refers to the condition where the quantity of a certain good more available than what is required or “demanded” by the market. In the same way, a “market shortage” refers to the condition where the quantity of a certain good is less available than what is “demanded” by the market. If quantity in demand is written as Qd and quantity that is supplied is written as Qs, then, the condition Qs > Qd indicates market surplus and condition Qd > Qs indicates market shortage.

How does Market Surplus and Market Shortage Impact the Price of a Product?

Let us imagine that the apple crop has been very good this year; the market is flooded with apples. The apple producers will not be able to sell all their produce, and therefore will lower their price. So, you can see that when there is a market surplus, the price of the product decreases. Every apple producer applies the same logic and the price of apples decreases. This scenario of excess supply of product has put pressure on the price of the product and has lowered the price. 

What will happen when the quantity demanded by the market equals the quantity supplied into the market? This is called “market equilibrium”.

What is “Market Equilibrium”?

In general, “equilibrium” means stability and in balance. In economics, a market is said to be in “equilibrium” when there is no excess supply or excess demand. In other words, goods supply equals goods demand. In this scenario, there will be no or very less price change.

Market Price

Let us learn another important term — market price. Market price refers to the price for what the product is available in the market. Market price of a product is impacted by demand and supply of the product.

Understanding Market Equilibrium

Let us recall “demand curve” and “supply curve”.

The following table shows the price of gasoline versus the average quantity of gasoline demanded by a person in Region A.

When the prices per gallon is high, the quantity demanded is less; as the price of the product decreases, the demand increases.

The supply curve indicates how the supply of a product changes with price change. Let us look at the same gasoline example. When the price per gallon is high, oil suppliers bring more supply into the market because they can make higher profits. This is called the law of supply. 

The following table shows the price of gasoline versus the quantity of gasoline supplied into the market of Region B. This is referred to as supply schedule.

The parameters of the x-axis and y-axis remain the same for both demand and supply curves, we can plot both the curves on the same graph.

Let’s look at this graph. While plotting price versus quantity of a Good X, you can find the point where the demand curve and supply curve intersect. 

The point where the demand and supply curves meet is called the equilibrium point. That is the price where the quantity demanded is equal to the quantity supplied. This point indicates equilibrium price and equilibrium quantity. In other words, equilibrium quantity is the amount bought and sold at the equilibrium price. When the market is not in equilibrium, market surplus and market shortage occur.

In the image shown above, the region that is above the price equilibrium indicates market surplus and the region below the price equilibrium indicates market shortage.

Consider the following graph:

Now, do you notice the area between the equilibrium price and the demand curve? Also, do you notice the area between the equilibrium price and the supply curve? These areas indicate "consumer surplus" and "producer surplus".

Examples to Explain Consumer Surplus and Producer Surplus

Let’s assume that you are willing to pay $30 for a ticket to your favorite movie; however, you are able to get a ticket for $25. The difference between what the consumer pays for a product ($25) and what he would have been willing to pay ($30) is called the consumer surplus. Here, the consumer surplus is $5. In the graph, consumer surplus is the area between the demand curve and the market price.

In another scenario, the market price of a large pizza is $7 but the pizza company sells it at $4. The price difference between what the pizza company receives ($4) and the price it would want to sell ($7) is called the producer surplus. The producer surplus here is $3. In the graph, producer surplus is the area between the supply curve and the market price.

Other Dimensions of Market Equilibrium

When any one or more of the demand factors change, the demand curve shows change. For example, when income of a segment of the population decreases as in the pandemic times, the demand for the product decreases. Factors of demand include price of the product, consumer preferences etc. In this condition, the demand curve shifts to the left indicating decrease in quantity consumed. When the income increases, the demand curve will shift to the right.

Similarly, when one or more of the supply factors change, the supply curve shows changes. For example, when the cost of production increases, the supply curve may shift to the left.

Context and Applications

Understanding market surplus and shortage is a fundamental concept for most economics and business courses.