Excess supply is a situation in which, for a given price, the quantity demanded by consumers is less than the stock offered by sellers.
To explain it another way, let's imagine that price P coincides with quantity Q1 on the demand curve. Meanwhile, on the supply curve, it corresponds to Q2.
As we can see in the following graph, Q1 is less than Q2 and the market is not in equilibrium.
Also, in mathematical terms, the excess supply is equal to the subtraction of Q2 minus Q1.
The excess supply can be fulfilled in a specific market or sector or in the aggregate of the entire economy.Offer added Producer surplus
Characteristics of excess supply
The main characteristics of excess supply are the following:
- There is an abundance of merchandise because the suppliers brought to the market more than the consumers want to buy.
- The price is higher than the equilibrium price in perfect competition.
- We are faced with a situation of imbalance where the economy does not reach the point of greatest efficiency.
- The opposite circumstance is excess demand.
- NEITHER the bidders nor the claimants get the maximum possible profit.
- In perfect competition, there is never a permanent oversupply because the market works efficiently. Thus, in the event of overproduction, companies lower their prices. Otherwise, they will have to withdraw. As a consequence, the quantity supplied will decrease and the quantity demanded will rise, reaching the equilibrium point.
- One of the most common causes of excess supply is that the authorities fix by law what will be the price (fixed or minimum) of a product and this, in turn, is higher than the market equilibrium.
- Losses are generated in consumer and producer surplus. This, with respect to a competitive market situation.
Example of oversupply
Suppose that the state, to "protect farmers", sets the price of corn at US $ 0.2 per kg. This is higher than the equilibrium price of US $ 0.16 per kg.
Given the above, the producers get excited and bring 10,000 kg of potatoes to the market. However, buyers are only willing to purchase 8,000 kg.
In conclusion, the government intervention generated an excess supply of 2,000 kg. Said surplus could be acquired, for example, by the same public sector and then sold abroad. Otherwise, it will be lost.