Effects of Surplus - Online Tutor, Practice Problems & Exam Prep

When the market price exceeds the equilibrium price, a surplus occurs, where the quantity supplied surpasses the quantity demanded. This excess supply indicates that more goods are available than consumers wish to purchase. For example, at a price of 8, the quantity demanded may be 5 units while the quantity supplied could be 14 units, creating a surplus of 9 units. Understanding this concept is crucial for analyzing market dynamics and the implications of price adjustments on consumer surplus and overall market efficiency.

Surplus

Now let's see what happens in situations where the market price is not set at the equilibrium price. So it's not always going to be an equilibrium, right? We're not perfect. There could be a situation where the price is set too high, right? So if the price is set above the equilibrium price, we're going to have what's called a surplus and a surplus is when the quantity supplied — let's do it in red — the quantity supplied is greater than the quantity demanded, right? So think about what that means. The quantity supplied being greater than the quantity demanded, that means that there was more being supplied than people wanted to buy. There's extra stuff here, there's what we call excess supply, right? So let's look at this on a graph and let's see how this really works.

So first, let's go ahead and label our graph. We've got our price axis here, our quantity axis here, and which line's demand and which line is supply. We've got our demand downward, with double d's, and then supply is just the other one. Cool? Alright. So in this graph, just like in the video about equilibrium, we have that equilibrium price here, right, where they cross is going to be 6, but let's go ahead and say that the market price isn't 6, the market price let's say is something higher than 6 like 8. I'm gonna put here pH for high price at 8. Cool? So our high price is 8.

Let's see what the quantity demanded and the quantity supplied is at that price. So I'm gonna go ahead and go across to my demand line to see where I cross it, and here is where I'm going to cross my demand line, at a price of 8. So let's see how much is the quantity demanded at this price. We're going to go down. We're going to be somewhere around here, right, and we'll say, this is the quantity demanded I'm going to put down there. I'm going to put that in blue because our demand line is blue right here. So quantity demanded and let's do the same thing. Let's keep going and at that price of 8, let's find where we cross our supply curve. So we're going to keep going here at that price of 8 and here we are. This is where we're going to pass the supply curve and let's find out what that quantity is over here. So we're going to go down, we're going to find a quantity supplied way up here. Right? So you can already see that the quantity demanded is less than the quantity supplied here, right? We've got a lot more being supplied. I'm going to put a little arrow in between here just to notice that there's a difference, right? So what we have is this surplus and the surplus can be identified right here as this area, this area right here. This is our surplus, right, between the quantity demanded of about 5 units and the quantity supplied of 14 units. Cool, so let's try the same thing with a low price.

Here’s what students ask on this topic:

What is a surplus in microeconomics?

A surplus in microeconomics occurs when the quantity supplied of a good exceeds the quantity demanded at a given price. This typically happens when the market price is set above the equilibrium price. For example, if the equilibrium price is $6 but the market price is set at $8, suppliers produce more than consumers are willing to buy, resulting in excess supply. This surplus can be visualized on a supply and demand graph where the quantity supplied is greater than the quantity demanded at the higher price point.

How does a surplus affect market prices?

A surplus affects market prices by creating downward pressure on the price. When there is excess supply, sellers are likely to lower their prices to attract more buyers and reduce their inventory. This price reduction continues until the market reaches equilibrium, where the quantity supplied equals the quantity demanded. Therefore, a surplus typically leads to a decrease in market prices over time as the market self-corrects.

What are the consequences of a surplus for producers and consumers?

For producers, a surplus means they have unsold goods, leading to potential losses or the need to lower prices to clear inventory. This can reduce their revenue and profit margins. For consumers, a surplus can be beneficial as it often results in lower prices, making goods more affordable. However, if the surplus persists, it may indicate inefficiencies in the market, such as overproduction or misallocation of resources.

How can a surplus be identified on a supply and demand graph?

A surplus can be identified on a supply and demand graph where the quantity supplied exceeds the quantity demanded at a given price above the equilibrium price. On the graph, this is shown by the supply curve being higher than the demand curve at that price point. The vertical distance between the supply and demand curves at this price represents the surplus, indicating the excess quantity supplied over the quantity demanded.

What strategies can be used to eliminate a surplus in the market?

To eliminate a surplus, several strategies can be employed: 1) Lowering the price: Reducing the price to increase demand and decrease supply until equilibrium is reached. 2) Reducing production: Producers can cut back on the quantity supplied to better match demand. 3) Increasing demand: Marketing efforts or improving product features can boost consumer interest. 4) Government intervention: Policies such as subsidies for consumers or buy-back programs can help reduce surplus.