Question

After watching the video clip from Jingle All the Way, consider the following: Prices serve a rationing function. When quantity demanded exceeds quantity supplied, prices rise to alleviate the shortage. When quantity supplied exceeds quantity demanded, prices fall to alleviate the surplus. However, when prices are inflexible, shortages and surpluses persist. Other rationing mechanisms must develop. Using demand and supply analysis, describe a specific situation where a shortage occurred. Why were prices unable to adjust in this market? Combining what you learned from your readings as well as from the video clip, what other rationing functions could develop to alleviate the shortage?

Answer 1

Answer :-

Prize pkays a vital role in case of demand and supply. When other things being constant, if the Demand exceeds supply of a particular product, its Price will increase. Reason being the supply is limited while there are a large number of consumers willing to purchase it. Thus it leads to increase in Price.Onthe other hand where supply exceeds the demand, the prices tend to fall.

The above concept is the case of 'Shortage'

Shortage means the case where quantity demanded exceeds quantity supplied in the market place.There are mainly 3 factors which lead to shortage .

1. Increase in Demand.

2. Decrease in supply

3. Government intervention