Question

Briefly explain and draw a graph whether the following statement is true or false: ‘When there is a shortage of a good, consumers eventually give up trying to buy it, so the demand for the good declines, and the price falls until the market is finally in equilibrium’.

Answer 1

The given statement is false .

Let's prove it with the help of a diagram. DD represents the demand curve of a good. Demand curve slopes downward because quantity demanded declines as price increases. SS is the supply curve of the good SS slopes upward because quantity supplied increases with price. Equilibrium in the market is determined by the intersection of demand curve DD and supply curve SS at E . Equilibrium quantity is Q and equilibrium price is P.

Now let's assume that, there is a shortage of the good which usually happens when price is lower than the equilibrium price. Suppose price is P1, then quantity supplied is Q1 but quantity demanded is Q2.

Q1<Q2

Therefore there is a shortage of good equal to Q1Q2.

9 5 price a P 5 Х Q, Q Q₂ Quantity

Now, when there is fall in supply and rise in demand, consumers won't give up buying the good. Instead , they will be ready to offer higher prices in order to acquire the good. Therefore, price of the good will increase from P1. Increase will continue till the price is P and quantity demanded matches quantity supplied bringing the economy back to equilibrium.