When there is excess supply, the supply of a market exceeds the demand. The cause of an excess supply can e.g. B. be justified with the overproduction of goods. But it also arises when demand falls because consumers do not have enough financial resources. The market price, which is determined by the relationship between supply and demand, is above the equilibrium price when there is excess supply.
This lesson covers excess supply. You will learn what an excess supply is and how the size can be determined. You will be informed about the effects of a supply surplus and you will learn how to differentiate it from the demand gap. To deepen your knowledge, you can answer a few exercise questions after the text.
- English: excess supply
- Synonym: excess supply
What is the significance of the excess supply in an economy?
If the supply exceeds the demand, there can be several reasons. An excess supply is the result of overproduction.
Has a company z. If, for example, you specialize in the manufacture of a certain product, excess supply arises when more products are available on the market than are in demand.
This situation also arises when there are more suppliers than buyers on the market. An excess supply can also be based on a decline in demand. This means that if the supply volume remains the same, there will be less demand from consumers.
How is an excess supply determined?
According to electronicsmatter.com, the excess supply is determined by comparing supply and demand. For a company, demand results from the amount it has sold.
What are the relevant factors for the determination?
The following two factors are required to determine the excess supply:
- Produced amount
- Sold amount
Calculation of the supply surplus
Example: Calculate excess supply
A company makes computers. These are sold to an intermediary. A total of 500 computers were manufactured in April 2020. 190 computers were sold in the same period. Of these, 40 computers were returned to the manufacturer because consumers withdrew from their purchase.
How much is the excess supply?
The supply quantity must be determined for the supply surplus. The quantity offered corresponds to the number of computers manufactured. It is 500 pieces. The total sold was 190 pieces. The 40 pieces that were returned to the manufacturer may not be taken into account.
What consequences can be drawn from an excess supply?
If the excess supply is only small, it is often ignored by companies. The advantage is that the company has some products in reserve when demand rises again. But z. B. no companies that produce perishable goods.
That is why even the smallest excess supply can turn into a disadvantage in this industry. Companies in the food industry always strive to keep the market in balance. In other industries, excess supply also leads to low profits.
The company’s liquidity is restricted because fixed costs continue to run while sales stagnate. The unsold goods in the warehouse cause additional capital commitment costs. This problem can e.g. B. can be solved by the fact that the company lowers the prices for the products in the short term and thereby reduces stocks.
Delimitation to the demand gap
A supply surplus is often equated with a demand gap. In both cases, the quantity offered exceeds demand.
A demand gap is also characterized by the fact that prices and quantities are falling at the same time. If there is an excess supply, the price drops. The amount offered is increasing.