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In economics, an excess supply, economic surplus [1] market surplus or briefly supply is a situation in which the quantity of a good or service supplied is more than the quantity demanded, [2] and the price is above the equilibrium level determined by supply and demand. That is, the quantity of the product that producers wish to sell exceeds ...
Excess demand yields an economic shortage. A negative excess demand is synonymous with an excess supply, in which case there will be an economic surplus of the good or resource. 'Excess demand' may be used more generally to refer to the algebraic value of quantity demanded minus quantity supplied, whether positive or negative.
As overproduction is the excess of production above consumption, this reduction in consumption worsens the problem. This creates a "feed-back loop" or " vicious cycle ", whereby excess inventories force businesses to reduce production, thereby reducing employment, which in turn reduces the demand for the excess inventories.
In the textbook story, favored by the followers of Léon Walras, if the quantity demanded does not equal the quantity supplied in a market, "price adjustment" is the rule: if there is a market surplus or glut (excess supply), prices fall, ending the glut, while a shortage (excess demand) causes price to rise.
A similar mechanism is believed to operate when there is a market surplus (glut), where prices fall until all the excess supply is sold. An example of excess supply is Christmas decorations that are still in stores several days after Christmas; the stores that still have boxes of decorations view these products as excess supply, so prices are ...
For an initial supply curve S 0, consumer surplus is the triangle above the line formed by price P 0 to the demand line (bounded on the left by the price axis and on the top by the demand line). If supply expands from S 0 to S 1, the consumers' surplus expands to the triangle above P 1 and below the demand line (still bounded by the price axis ...
Prices are announced (perhaps by an "auctioneer"), and agents state how much of each good they would like to offer (supply) or purchase (demand). No transactions and no production take place at disequilibrium prices. Instead, prices are lowered for goods with positive prices and excess supply. Prices are raised for goods with excess demand.
The equilibrium price in the market is $5.00 where demand and supply are equal at 12,000 units; If the current market price was $3.00 – there would be excess demand for 8,000 units, creating a shortage. If the current market price was $8.00 – there would be excess supply of 12,000 units.