A shortage means that at the current price buyers want more than sellers offer. The price adjustment model explains how the market moves away from that gap. The skill is writing the steps in order, with the right words for each.
This is the third lesson in supply and equilibrium, and it uses the schedule reading from finding an equilibrium.
How does the model work, step by step?
- State the price and the two quantities. Say which is bigger.
- Name the gap. “Quantity demanded exceeds quantity supplied by X units, so there is a shortage.”
- Describe the pressure. Buyers compete for the limited units, and sellers can see goods selling quickly.
- Describe the price response. The price rises.
- Describe the quantity responses. As the price rises, quantity supplied extends and quantity demanded contracts. The gap narrows.
- Conclude. The price stops changing when the two quantities are equal, which is equilibrium.
The model assumes the price can move freely. If it cannot, the shortage can last, and that is a topic for later lessons and for market failure concepts.
Worked example
Return to the lunch box market in Port Merah.
| Price (RM) | Quantity demanded | Quantity supplied |
|---|---|---|
| 10 | 90 | 20 |
| 15 | 75 | 40 |
| 18 | 66 | 52 |
| 20 | 60 | 60 |
| 25 | 45 | 80 |
Suppose the price is RM15.
Gap: demand 75 minus supply 40 is a shortage of 35 boxes.
Response: buyers want boxes that are not there, and sellers see they can charge more. The price starts to rise.
Midway check: at RM18, demand is 66 and supply is 52, so the shortage is 14. It has shrunk because quantity supplied extended from 40 to 52 and quantity demanded contracted from 75 to 66.
End point: at RM20, both are 60. Nothing is left over and the price stays put. The market has moved to equilibrium.
A written answer might read: “At RM15, quantity demanded (75) exceeds quantity supplied (40), a shortage of 35. Sellers can raise prices because buyers are competing. As the price rises, quantity supplied extends and quantity demanded contracts, until at RM20 both are 60. The market is then in equilibrium.”
What mistake do students make?
Mistaken answer: “There is a shortage, so the demand curve shifts left and the price falls.”
This runs the model in the wrong direction and also confuses a movement with a shift. A shortage pushes the price up, and neither curve needs to shift. The movement happens along both curves.
The correction is to write the direction of the price first. Shortage means price up. Surplus means price down.
Check yourself
1. Using the schedule above, what is the size and type of the gap at RM25?
Show answer
Quantity supplied 80 minus quantity demanded 45 is a surplus of 35. The price would fall towards RM20.
2. At RM10, what is the shortage? Does this look bigger or smaller than at RM15?
Show answer
Demand 90 minus supply 20 is a shortage of 70. It is bigger than the shortage of 35 at RM15, so the further the price is below equilibrium, the larger the gap.
3. Write two sentences explaining what happens to quantity supplied as a market with a shortage moves towards equilibrium.
Show answer
“As the price rises, sellers are willing to offer more, so quantity supplied extends along the supply curve. This continues until quantity supplied equals quantity demanded at equilibrium.”
Where this leads next
Next, trace simultaneous shifts when two things change at once. You can test the whole chain in the supply and equilibrium practice set.
If your explanations are right in your head but do not read clearly on paper, online one-to-one Economics tuition gives you a teacher to write and revise answers with.