Why Does the Market Price Rise If It Is Below the Equilibrium Price?
There is a shortage of a good or service when the quantity demanded exceeds the quantity supplied. Shortages occur when the price is below its equilibrium level.
Now suppose the price is below its equilibrium level—say, at $2.75 per BTU, as shown in Figure 3-13. In this case, the quantity demanded, 11.5 trillion BTUs, exceeds the quantity supplied, 9.1 trillion BTUs, implying that there are would-be buyers who cannot find natural gas: there is a shortage, also known as an excess demand, of 2.4 trillion BTUs.
Price Below Its Equilibrium Level Creates a Shortage The market price of $2.75 is below the equilibrium price of $3. This creates a shortage: consumers want to buy 11.5 trillion BTUs, but only 9.1 trillion BTUs are for sale, so there is a shortage of 2.4 trillion BTUs. This shortage will push the price up until it reaches the equilibrium price of $3.
When there is a shortage, there are frustrated would-be buyers—people who want to purchase natural gas but cannot find willing sellers at the current price. In this situation, either buyers will offer more than the prevailing price or sellers will realize that they can charge higher prices. Either way, the result is to drive up the prevailing price. This bidding up of prices happens whenever there are shortages—and there will be shortages whenever the price is below its equilibrium level. So the market price will always rise if it is below the equilibrium level.