• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer
Finance Train

Finance Train

High Quality tutorials for finance, risk, data science

  • Home
  • Data Science
  • CFA® Exam
  • PRM Exam
  • Tutorials
  • Careers
  • Products
  • Login

Excess Demand and Excess Supply

CFA® Exam Level 1, Economics

Demand and Supply Excess Demand and Excess Supply

Based on the demand and supply curve, the market forces drive the price to its equilibrium level.

There are two possibilities: 1) Excess Demand or 2) Excess Supply

Excess supply is the situation where the price is above its equilibrium price. The quantity willing supplied by the producers is higher than the quantity demanded by the consumers.

Excess demand is the situation where the price is below its equilibrium price. The quantity supplied is lower than the quantity demanded by the consumers.

The following chart illustrates the excess demand and excess supply.

Supply and Demand

In each of these situations market forces will interact to drive the prices to its equilibrium level.

When we have higher prices and excess supply, manufacturers will have excess inventories and the competition among manufacturers will put the downward pressure on price as there will be some suppliers who will be willing to supply at lower prices. As prices fall, the consumer demand will increase until it finally settles at the equilibrium price.

When we have lower prices and excess demand, there will shortage of goods, putting an upward pressure on the price as there will be more buyers chasing the available goods. As price increases the suppliers will start producing more but the demand from buyers will decrease. This will drive the price and quantity to its equilibrium level.

Calculating Excess Supply and Demand

Let’s say we have the following demand and supply functions:

Qd = 415,000 – 1,200P

Qs = 40,000+150P

The equilibrium price can be calculated by equating the two functions and solving for P

415,000 – 1,200P = 40,000+150P

P = 375,000/1350 = 277.78

We will have excess supply when price is above 277.78 and excess demand when price is below 277.78.

At this price the quantity demanded and supplied is 81,667.

At P=300, the quantity supplied will be = 40,000+150*300 = 85,000. The excess supply is 85,000 – 81,667 = 3,333

At P = 200, the quantity demanded is = 415,000 – 1,200*200 = 175,000. The excess demand is 175,000 – 81,667 = 93,333.

Previous Lesson
Back to Course
Next Lesson

Primary Sidebar

In this Course

Course Home
Types of Markets in Economics
Demand Function and Demand Curve
Supply Function and Supply Curve
Shifts in Demand and Supply Curves
Aggregating Demand and Supply Curves and Concept of Equilibrium
Excess Demand and Excess Supply
Stable and Unstable Equilibrium
Types of Auctions
Four Methods of Distributing Government Securities
Consumer and Producer Surplus
Effects of Government Regulation on Demand and Supply
Price Elasticity of Demand
Income Elasticity of Demand
Cross Price Elasticity of Demand
Return to Demand and Supply

Latest Tutorials

    • Data Visualization with R
    • Derivatives with R
    • Machine Learning in Finance Using Python
    • Credit Risk Modelling in R
    • Quantitative Trading Strategies in R
    • Financial Time Series Analysis in R
    • VaR Mapping
    • Option Valuation
    • Financial Reporting Standards
    • Fraud
Facebook Group

Membership

Unlock full access to Finance Train and see the entire library of member-only content and resources.

Subscribe

Footer

Recent Posts

  • How to Improve your Financial Health
  • CFA® Exam Overview and Guidelines (Updated for 2021)
  • Changing Themes (Look and Feel) in ggplot2 in R
  • Coordinates in ggplot2 in R
  • Facets for ggplot2 Charts in R (Faceting Layer)

Products

  • Level I Authority for CFA® Exam
  • CFA Level I Practice Questions
  • CFA Level I Mock Exam
  • Level II Question Bank for CFA® Exam
  • PRM Exam 1 Practice Question Bank
  • All Products

Quick Links

  • Privacy Policy
  • Contact Us

CFA Institute does not endorse, promote or warrant the accuracy or quality of Finance Train. CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.

Copyright © 2021 Finance Train. All rights reserved.

  • About Us
  • Privacy Policy
  • Contact Us