Activity 2m: When markets don’t clear
- Shortages arise when the wrong price has been set in the market. It is a disequilibrium situation where the quantity demanded is greater than the quantity supplied at the prevailing price.
- When there is a shortage, consumers may bid up the price to ensure that they receive the scarce goods. Suppliers might also realise that their products are selling out quickly and will take advantage by raising prices. In doing so demand contracts because less people can afford them and it also incentivises new production (and possible entrants) into the market. Demand contracts and supply expands until a new equilibrium is reached.
- There are a number of examples in the case study. One example is the market for Maths teachers. There is currently a shortage of Maths teachers which, if the market was operating efficiently, would result in an increase in the wages paid to Maths teachers relative to other teachers. For reasons of fairness and to maintain harmony in the workplace, this rarely happens.
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Advantages of paying Maths teachers more:
- attracts more Maths experts into the profession by reducing the opportunity costs associated with becoming a teacher
- possibly reduces the shortages meaning that more students are taught by qualified Maths teachers
- In the long run, the quality of Maths education increases which has flow on benefits for the Australian economy (positive externalities are discussed in chapter 3)
Disadvantages
- It could be perceived as unfair by other teachers who are working equally as hard
- It might result in shortages in other areas that require Maths specialists
- It increases the costs associated with providing education (so schools/the government might try to curtail other salaries so they can pay for the Maths teachers).
5. Research required