Excess Demand & Excess Supply

Excess demand occurs when the price is set above the equilibrium price (P*)At this point, the price is too high, so that not enough consumers demand the good, and suppliers are supplying too much of it.What happens in this situation is that the low demand leads to price competition among suppliers - as not enough people demand their goods at the current market price, they are willing to drop their prices to sell all of their goods - this drives the market price of the good down.We can deduce from this that a state of excess supply leads to DOWNWARD PRESSURE on prices Price competition among suppliers in a state of excess supply drives prices downwards towards its equilibrium price

Excess Demand & Excess Supply

When the price is not at the equilibrium price, it will result in Excess Demand and Excess SupplyEach of these have economic implications which are discussed below

Excess Demand

Excess demand occurs when the price is set below the equilibrium price (P*)At this point, the price is so low that too many consumers demand the good, and suppliers are not supplying enough of it.What happens in this situation is that the high demand leads to price competition - as some demand it more than others, they are willing to pay more for it than others - this drives the market price of the good up, and also drives supply up.We can deduce from this that a state of excess demand leads to UPWARD PRESSURE on pricesPrice competition in a state of excess demand drives prices upwards towards its equilibrium price

Excess Supply

Excess Demand & Excess Supply