Question
When do we say there is excess supply for a commodity in the market?
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Answer
- If price was above the equilibrium (e.g. P1), then supply (Q1) would be greater than demand (Q3) and therefore there is too much supply. There is a surplus.
- Therefore firms would reduce price and supply less. This would encourage more demand and therefore the surplus will be eliminated. The market equilibrium will be at Q2 and Pe.
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