Excess of demand, also known as demand surplus, occurs when the quantity of a good or service that consumers want to purchase exceeds the quantity that producers are willing to supply at a given price. This situation often leads to a shortage in the market, where consumers are unable to purchase the desired goods at the prevailing price.
Key Characteristics of Excess Demand:
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Price Below Equilibrium: Excess demand usually arises in a market where the price of a good or service is set below its equilibrium level—the price at which the quantity supplied equals the quantity demanded.
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Consumer Behavior: When prices are low, consumers may feel encouraged to buy more of a product, which contributes to overall increased demand.
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Supplier Response: If producers notice that there is more demand than they can meet, they may respond by raising prices, increasing production, or both.
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Shortages: Excess demand leads to shortages, meaning that not all consumers who want to buy the product at the current price can do so. This may create long waiting lines or unfulfilled orders.
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Market Adjustments: Over time, markets typically adjust to eliminate excess demand. This can happen through price increases, which reduce demand and encourage suppliers to produce more, eventually reaching a new equilibrium.
Example:
Consider a popular smartphone that is released at a certain price. If the price is set too low, many consumers rush to purchase it. If the company cannot produce enough units to meet this heightened demand, an excess of demand occurs. Consumers might find it hard to get the smartphone at the original price, leading to potential price increases or producers ramping up their manufacturing processes to the meet demand.
In summary, excess demand is an important concept in economics that highlights the interaction between supply and demand and the effects of price on market dynamics.