Business and economics 101: a market is at equilibrium when the quantity demand is on par with the quantity supplied within the market price. A shortage implies a situation where there is a higher demand than the supply of a product. When we experience a shortage, the market is at disequilibrium.
It may seem that there needs to be a severe shift in business patterns for such a major shift to happen, but it doesn’t take much at all. The shortage of one product can have massive implications on the global economy.
Product Shortages Hurt the Global Economy
Shortages commonly occur in command economies. In this case, the government may set low prices for certain commodities so that goods may sell inexpensively. For example, if the government decided to give out free masa harina (corn flour) from local companies, the demand for the flour will go up. Eventually, as consumers are bound to do, especially if unregulated, people will overconsume. Consumers may then experience a shortage. This shortage can cause a few problems.
Increased Demand for a Substitute Good
A shortage of one product will increase the demand for alternative commodities. For example, when there is a shortage of cornflour, people may resolve to buy wheat flour.
The economy may suffer the increased price of goods because traders will take advantage of the shortage and sell substitute goods at higher prices.
Increase in Black Market Commodities
A shortage will encourage black market sales. People will be willing to spend more to get the commodity. Sellers who had earlier stocked that product will take advantage of the situation and sell at higher prices, above the market price. In the case of a corn flour shortage, traders might import low-quality corn flour at lower costs and sell them through the black market at higher prices.
If there is a shortage of a product, people will spend their time queuing to buy the limited products. Going back to our corn flour shortage, people will queue for the flour when the government issues free bags because there will be a shortage in supermarkets and shops. Most people will end up wasting their time in queues instead of doing other productive activities.
Deadweight loss is the price of a product caused by market inefficiencies. If the government was to increase the tax on sugar, the demand, and supply of sugar will decrease as the price of sugar increases. Global economies will feel the effects of this inflation as well. Most people will stop consuming sugar and sugar products, and companies will have to handle excess, unsold products.
When there is a shortage, consumers will stock up on goods before they disappear in the market. Therefore, people will use their income and even savings to buy the remaining products in the market. Stocking up will give them hope that they might resell the commodity at higher prices soon. Traders may take advantage of the situation to hike the costs of the commodities because there will be an increase in demand.
If the manufacturers increased the supply at the same market price, the consumers who bought the items at higher prices would be left with deadstock that they cannot resell later.
A shortage of one product affects the global economy because an increase in market prices can lead to an economic recession. Recession periods increase poverty as people spend more than they earn; people will lose their jobs; alternative commodities will cheapen.
A shortage is reversible when the supply is increased to match the demand. But shortages are usually a result of deeper social, climate, or international relations issues.