A-Level Economics Notes on Excess Supply and Demand

Definitions

1. Excess Supply (Surplus): A situation where the quantity of a good or service offered for sale exceeds the quantity that consumers are willing to buy at a given price.
2. Excess Demand: Occurs when the price of a good is lower than the equilibrium price, leading to a higher quantity demanded than what is supplied.
3. Equilibrium Price: The price at which the quantity demanded equals the quantity supplied.
4. Quantity Demanded: The amount of a good or service that consumers are willing to buy at a specific price.
5. Quantity Supplied: The amount of a good or service that producers are willing to sell at a specific price.
6. Demand Curve: A graph showing the relationship between the price of a good and the quantity demanded.
7. Supply Curve: A graph showing the relationship between the price of a good and the quantity supplied.
8. Market Equilibrium: A state where supply equals demand, and there is neither excess supply nor excess demand.
9. Price Ceiling: The maximum price a firm can charge for a good or service.
10. Price Floor: The minimum price that can be legally charged for a good or service.
11. Shortage: A situation where the quantity demanded is greater than the quantity supplied.

Diagrams

 Excess Supply

Excess supply is a situation where the quantity of a product available in the market exceeds the quantity that consumers are willing to buy at a given price. In simpler terms, there’s more of something for sale than people want to buy. This often happens when the price of a product is set too high, making it less attractive for consumers to purchase.

For example, let’s say a local farmer grows too many pumpkins for Halloween and prices them at $20 each. If people in the community find this too expensive and only a few pumpkins are sold, the farmer will have an excess supply of pumpkins.

Excess supply can have several consequences. It may lead to a surplus of goods, which can result in waste if the products are perishable. Sellers might have to lower prices to clear out inventory, which can impact their profits. In some cases, like when minimum wage is set above the market equilibrium, excess supply can even lead to unemployment.

Excess Demand

Excess demand occurs when the quantity of a product that consumers want to buy exceeds the quantity available in the market at a given price. In simpler terms, there are more buyers than there are products to buy. This often happens when the price of a product is set too low, making it more attractive for consumers.

For example, consider the housing market in a booming urban area. If there are more people looking for homes than there are homes available, this creates excess demand. The result is often a rapid increase in housing prices, as sellers take advantage of the high demand.

Excess demand can lead to several outcomes:

1. Price Increase: Sellers may raise prices to balance demand with supply.
2. Shortages: Products may run out, leading to waiting lists or even rationing.
3. Black Markets: In extreme cases, a black market may emerge where the product is sold at even higher prices.

Understanding excess demand is crucial for both policymakers and businesses, as it helps them make informed decisions about pricing and production.