Explain the chain of effects of excess supply of a good on its equilibrium price.
Dear student
Excess supply is defined as a situation, where the market demand falls short of the market supply at a given price. In this case, competition among the sellers increase which in turn will result in a fall in the market price.
Excess supply leads to fall in price because during excess supply each and every seller wants to sell his commodity and thus would fix a low price to sell the it. When there is low price, the demand would increase because of law of demand. Thus this price will continue to fall until the excess supply is cleared, i.e., price will decrease to the level where market demand is equal to the market supply.
Hope it clears now.
Regards
Excess supply is defined as a situation, where the market demand falls short of the market supply at a given price. In this case, competition among the sellers increase which in turn will result in a fall in the market price.
Excess supply leads to fall in price because during excess supply each and every seller wants to sell his commodity and thus would fix a low price to sell the it. When there is low price, the demand would increase because of law of demand. Thus this price will continue to fall until the excess supply is cleared, i.e., price will decrease to the level where market demand is equal to the market supply.
Hope it clears now.
Regards