EC120 Lecture Notes - Lecture 4: Economic Equilibrium, Demand Curve
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EC120 Full Course Notes
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Shortage: when quantity demanded is greater than quantity supplied. Shortages are generally inefficient: one solution to a shortage is to ration through lines or waiting lists, people standing in line is inefficient. Surplus: when quantity supplied is greater than quantity demanded. A surplus is generally inefficient: goods are produced that no one is benefiting from. When markets work, prices adjust such that demand equals supply. This eliminates the inefficiency of shortages or surpluses. A price system also allocates goods to those willing to pay the most: discuss later whether this is a positive feature. What types of goods would have a high price elasticity of demand: perfectly elastic horizontal demand curve. E. g. pencils, (goods with substitutes will have higher elasticity) What types of goods would have a low price elasticity of demand: perfectly inelastic vertical demand curve. What types of goods would have a high price elasticity of supply: perfectly elastic horizontal supply curve.
