In the diagram below, there is a market for a normal good. This good is at equilibrium at $20. There are 50 units being produced and 50 units being consumed.
Now, let us say that consumer income has increased thereby increasing the demand for the normal good. Along the curve D', there are 100 units demanded at the price of $20 while sellers are only producing 50 units at $20. As a result, there is a shortage of 50 units in the market. At this point, many argue that markets are no longer efficient because they are not at equilibrium. What these critics fail to realize is that markets have a self-correcting mechanism for shortages known as competition between consumers.
The shortage of 50 units leaves 50 consumers unsatisfied. In order to ensure their possession of the good, consumers must compete with one another to get what they want. The way markets allow for consumers to do this is by demonstrating an increased willingness to pay for the good. Consumer competition results in an upward price pressure that separates consumers who value the good more than the rest. Producers are able to see that their good is sold out and there are lines for their products. Sellers can raise prices for their goods and because of increased prices are able to produce more units. Some consumers will decide that the increased price for the good is more than what they deem worthy and will leave the market. This process sends information to both consumers and producers and alters their behaviors.
In the diagram below, consumer competition results in price pressures from $20 to $30. Sellers increase the quantity of units produced and consumers leave the market until there is a new equilibrium quantity of units supplied and demanded. So the next time you begin to notice higher prices, realize the supply and demand implications and how it is often actually your fellow consumer causing prices to increase. Also notice that there was no central planning agency that achieved this new market equilibrium. It is much too complicated for any government to predict and control prices and quantities of goods- as it would take years to compile the data necessary and by that point market conditions would have already changed- and there is no need for the government to do so. Shortages are essentially a problem in pricing and the market will self-correct the problem.
