excessdemand

Excess demand, also known as a shortage, occurs in economics when the quantity of a good or service that consumers are willing and able to buy at a given price exceeds the quantity that producers are willing and able to sell at that price. This situation typically arises when the market price is set below the equilibrium price. At a price lower than the equilibrium, more consumers will want to purchase the good because it is cheaper, while fewer producers will be incentivized to supply it due to lower potential revenue.

The consequence of excess demand is that consumers are unable to purchase all the goods and services they desire at the prevailing price. This can lead to queues, rationing, and a general sense of scarcity. In a free market, the presence of excess demand creates upward pressure on prices. As consumers compete for the limited supply, they may be willing to pay more, and producers, seeing the high demand, will be inclined to raise prices. This price adjustment mechanism continues until the price reaches the equilibrium level, where the quantity demanded equals the quantity supplied, thus eliminating the excess demand.

Understanding excess demand is crucial for analyzing market dynamics and the effectiveness of price controls. If a government imposes a price ceiling below the equilibrium price, it can inadvertently create persistent excess demand, as the market is prevented from adjusting to its natural clearing point.