Question

What makes surplus and shortage inefficient? Explain.Also How and why do we go back to equilibrium in each of these cases?

Answer 1

Surplus and shortage are sorts of inefficiency. A surplus is a sort of inefficiency because an excess of good is produced. It reflects that scarce resources are utilized in production of good that no one wants. Similarly a shortage is also a sort of inefficiency because too little of a good is being produced. All of society's needs or requirements would not be met.

Surpluses will reduce price that increase quantity demanded and decrease quantity supplied moving toward equilibrium. Shortages below equilibrium increase prices that reduce the quantity demanded and increase quantity supplied moving toward equilibrium.