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How do shortages and surpluses affect prices?

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Quick Answer

A shortage or surplus occurs when the supply for a good or service does not equal demand, with shortages causing a general rise in price and surpluses causing prices to fall. The price change continues until a new equilibrium between supply and demand is reached, according to the Experimental Economics Center from the Andrew Young School at Georgia State University.

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Full Answer

A shortage, according to the Experimental Economics Center, occurs when demand outstrips supply. This shortage puts upward pressure on the price of the good or service sold. The price continues to rise until customer demand falls to meet the level of supply or until production increases to meet the present demand. The opposite is true of surpluses. When there is a surplus, prices drop until demand grows to meet the supply or production reduces to the level of actual demand. In both cases, the new point at which demand and supply are equal is known as the market equilibrium.

The pressure on pricing is not absolute, as outside conditions may keep prices from changing. The market where prices are most affected by shortages and surpluses is one in which there is perfect competition. A perfectly competitively market is one that is unimpeded by government or trade restrictions, allowing market forces to determine prices naturally, notes the Experimental Economics Center.

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