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In economics, a shortage is defined as an economic condition whereby demand exceeds supply at the prevailing price. The opposite condition is called a surplus.

A shortage should not be confused with scarcity. Scarcity, the notion that all goods exist in limited supply, is considered a fundamental law of economics. A shortage, however, exists when a market can not be established or when a market is constrained in such a way that sellers can not provide enough of a good or service to satisfy all buyers who are willing to pay the prevailing price.

Well functioning markets require trust, liquidity, rapid settlement, and free access. So-called perfect markets have the following characteristics:

* Perfect information exchange among potential buyers and sellers: All parties understand the terms of sale and the characteristics of the products and services offered for sale. * Frictionless commerce. There are no costs of processing and settling transactions. Buyers and sellers have a common currency; terms of trade are established by well-defined contracts; buyers and sellers honor their contracts; markets have sufficient hours of operation and clear quickly. * All buyers and all sellers have equal and unfettered access to markets Free markets are ones that satisfy the above principles and also allow prices to fluctuate in such a way that buyers and sellers can find a common price at which all goods and services offered for sale are exchanged (that is, markets "clear"). According to the theory of free markets, a shortage will occur when a price is fixed at a level below that which would clear the market.

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16y ago

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