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Specifically, there is a overproduction of supply that producers wish to sell due to a shortage in demand for the product. Another term used to describe an excess supply is “surplus”.[1].
Prices[edit]
Prices and the occurrence excess supply [illustrates]] a strong correlation. When the price of a good is set too high, the demand for the product will start to degrade until there is more quantity supplied than quantity demanded. The occurrence of excess supply either leads to lower prices or unsold supply. Lowering the price of a good enables consumers to start spending again as it has become affordable.
Disequilibrium of excess supply[edit]
A disequilibrium market transpires due to a lack of balance between supply, demand, and prices.[2] Excess supply is one of the two conditions of disequilibrium in a perfect competition market; excess demand being the other condition. When quantity supplied is greater than quantity demanded,[3] the equilibrium level transitions into a disequilibrium market. For this reason, an excess supply prevent the economy from operating efficiently, which instead causes a dysfunctional market.
Utilizing the Concept of Excess Supply[edit]
Excess supply in a perfect competition market is the “extra” amount of supply, distinguishing from quantity demanded. The market for televisions demonstrates the establishment a “surplus". Suppose the price of a television is $600, the quantity supplied is 1000, and the quantity demanded is 300 televisions. This illustrates that sellers are seeking to sell 700 more televisions than buyers willingness to purchase the product. Hence, an excess supply of 700 televisions would move the market into a state of disequilibrium. In this situation, producers would not be able to sell a television at the price of $600. This will induce them to reduce their price of the television in order to make the product more affordable for the buyers. In response to the reduction in price of the product, consumers will increase their quantity demanded. The market will eventually become balanced as the market is transitioning to an equilibrium price and quantity. A market that is in an equilibrium state enables firms to stay competitive in that market.[4]ly/Lecture.html</ref>