Understanding the Economic Logic of Scarcity, Shortage, and Surplus

Summary：Whether it's shortage or surplus, both are linked to imbalances in price mechanisms. When prices cannot freely adjust, the market behaves abnormally. Shortages occur when prices are suppressed, forcing people to compete through other means to acquire goods. Surplus, on the other hand, happens when prices are inflated, leading to excess supply that cannot be sold. Understanding the economic logic behind scarcity, shortage, and surplus can help us better navigate real-world market phenomena.

Do you remember? At the start of our lessons, we discussed how scarcity is a fundamental fact of the world. Scarcity is one of the core concepts in economics. However, we also hear another term frequently: shortage. What’s the relationship between scarcity and shortage?

Even more intriguingly, if scarcity is a fundamental fact, why does the term “surplus” exist? Today, let's explore the economic logic behind these three concepts.

 1. The Relationship Between Scarcity and Shortage

Scarcity is nothing new. It represents the fact that there is never enough of the good things in this world, and everyone is competing for limited resources. This constant competition is called scarcity. However, the concept of shortage often garners more attention in the news. For example, a sudden shortage of a product can become a headline. So why is scarcity nothing new, while shortage makes the news?

Some might argue that shortages are temporary, while scarcity is permanent. This explanation, however, is not accurate. Scarcity is indeed permanent, and even in the short term, every product is scarce. The reason shortage exists lies elsewhere. Economists define shortage in a specific way: it occurs when the price of a product is suppressed, meaning people cannot rely solely on price competition to acquire the product.

For instance, in big cities, taxis are often in short supply. Although taxis are not essential goods, when their prices are kept low, supply and demand are imbalanced, and people must compete by waiting in line or using other non-price mechanisms to get a ride. This differs from scarcity, where the issue is merely that resources are limited, whereas a shortage arises when prices are artificially restrained, preventing the market from naturally balancing supply and demand.

 2. The Nature of Shortage: Price Suppression

The core reason for shortages is that prices are not allowed to reflect the true market demand, forcing people to use non-price methods to obtain goods. This kind of competition might involve waiting, using connections, or relying on vouchers. Historically, the “shortage economy” seen during planned economies is a perfect example of this phenomenon. Goods couldn’t be obtained through normal channels, and waiting in line or using ration tickets became common practice. Social resources were wasted on these inefficient competitive methods.

For example, Beijing once experienced a shortage of taxis, but the issue wasn't the number of vehicles; it was that prices were not properly adjusted. As a result, people had to wait long periods to “compete” for taxi availability. If taxi fares were set high enough—similar to luxury hotel rooms—then supply and demand would naturally adjust, and the shortage would disappear.

3. Surplus: The Result of Artificially Elevated Prices

Conversely, surplus arises when the price of a product is artificially elevated, resulting in supply exceeding demand. A classic example is agricultural products. Governments often raise the price of agricultural goods to support farmers, which leads to overproduction. However, since government subsidies are limited, farmers end up competing for government quotas to sell their products, leading to the phenomenon known as "surplus."

In the past, people used to say that capitalism was corrupt, claiming that milk was dumped, meat rotted, and potatoes were left to spoil in the fields. In reality, this was due to artificially high prices, which prevented the market from absorbing the surplus.