A shortage is the excess of quantity demanded over quantity supplied when the price is below equilibrium.

At $4 per book, readers demand 400 million books, but firms only print 200 million; a short­age of 200 million books annually is depicted in Figure 11. Publishers will try to satisfy unhappy, bookless customers who clamor for the limited quantities available by raising the price until the market clears; then books will be readily avail­able for the people most desperate to buy them. (Clearing occurs because quantity supplied rises as price rises while quantity demanded falls; they become equal at the equilibrium price.)

Equilibration is not instantaneous. Firms experiment with output prices in a process re­sembling an auction. Inventories vanishing from store shelves are signals that prices may be too low. Retailers will order more goods and, be­cause the market will bear it, may also raise prices. If retail ordersgrow rapidly, prices also tend to rise at the wholesale level, quickly elim­inating most shortages. People refer totight markets, or sellers' markets, when shortages are widespread. Suppliers easily sell all they pro­duce, so quality may decline somewhat while sellers raise prices. Many sellers also exercise fa­voritismin deciding which customers to serve during shortages.

When prices exceed equilibrium, surpluses create buyers' markets and force sellers to con­siderprice cuts. This is especially painful if pro­duction costs are resistant to downward pressures even though sales drop. (Most work­ers stubbornly oppose wage cuts.) In many cases, firms can shrink inventories and cut costs only by laying workers off and drastically reducing production. The price system ultimately forces prices down if there are continuing surpluses.

In 1776, Adam Smith described these types of self-corrections as the "invisible hand" of the marketplace. Price hikeseliminate shortages fairly rapidly, and price cuts eventually cure sur­pluses, but such automatic market adjustments may seem like slow torture to buyers and sell­ers. How rapidly markets adjust to changed cir­cumstances depends on (a) the quality of information and how widely and quickly the rel­evant information is disseminated, and (b) mar­ket structure —the vigor or lack of competition.

Evidence that adjustment processes may be long and traumatic includes huge losses by major firms and sluggish economies in many industrial states during the recession of 1990-1991. Contrary evidence includes rapid changes in the prices of stocks in response tochanges in profitsreported by major corporations. Different views about the speed of typical market mechanisms in the economy as a wholeare central to debates be­tween modern advocates of various schools of macroeconomic thought. Most economists agree, however, that long-term shortages or surpluses are, almost without exception, consequences of governmental price controls.

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