There has been much talk in the whiskey world recently about an alleged shortage of bourbon. Given that one can walk into any liquor store in the nation and buy as much bourbon as one can carry, this is clearly absurd on the face of it. But let’s dive a little deeper into our microeconomic theory to see what’s going on here.

While it is certainly not true that there is a shortage of bourbon in general, nor even of good quality bourbon, it is definitely true that there are shortages of certain kinds of bourbon. But why is this? The answer might surprise you, as it has little to do with how much bourbon is made.

Imagine that Buffalo Trace lowered the price of Weller 12 bourbon to $1 a bottle. Consumers across the country would flock to liquor stores to buy all they could at that price. Demand would surge. There would then be a shortage of Weller 12 bourbon – i.e., the demand to purchase would exceed the supply available for sale.

Now imagine that Buffalo Trace raised the price of Weller 12 bourbon to $100 a bottle. A few consumers would still buy it at that price – but very few. The demand would plummet. There would thus be a surplus of Weller 12 bourbon – i.e., the supply would exceed the demand.

Note that in neither case has the actual supply of Weller 12 – the amount of bourbon available for purchase – changed. Yet we went from a shortage to a surplus. All because the price changed.

The reason that there is a shortage of particular types of bourbon is because they are generally sold at below-market prices. (At the same time there are many stores that have these much coveted products on their shelves – at a price higher than the average consumer is willing to pay.) Were the distillery/distributor/store to raise the prices of these bourbons, the surplus would disappear and an equilibrium price would eventually be reached.

Bottom line: there is a shortage of Pappy Van Winkle 23 Year Old bourbon at $250. There is not a shortage at $2500.

(Note that this model is simplified to assume that the distillery is selling the product directly, not through the three-tier system, which is what happens in the real world. But the underlying market forces are the same.)