Question

Explain the concept of excess demand. How is equilibrium restored

Answer 1

Hi,

Excess supply is a situation where goods or services have flooded the market but the takers are not there enough for them. This leads to a lot of inventory in the goods produced. Thus there is usually a price cut observed in such situations.

Excess demand on the other hand is vice versa. There is immense demand in the market by the consumers but the quantity of products is not there to meet the needs. So, the price of the good keeps going up, as in a free market without any encumbrances on price ceiling, the one who pays more gets entitled to the product. Here there will be almost zero inventory.

Hope this helps!