Question

When do we say that there is an excess demand for a commodity in the market?

Answer 1

If price is below the equilibrium

• If price was below the equilibrium at P2 then demand would be greater than the supply. Therefore there is a shortage of (Q2 – Q1)
• If there is a shortage, firms will put up prices and supply more. As price rises there will be a movement along the demand curve and less will be demanded.
• Therefore price will rise to Pe until there is no shortage and supply = demand