In a market with excess supply, what is the likely effect on price?

In a market with excess supply, what is the likely effect on price?

• A. Price will rise
• B. Price will fall
• C. Price will stay the same
• D. Price will become negative

Answer: (B)

Excess supply occurs when at the current price, producers want to sell more than buyers want to buy. To clear this oversupply, sellers have an incentive to cut prices. Lower prices encourage more people to buy (so quantity demanded rises) and can discourage production or reduce the quantity supplied, narrowing the surplus. The process continues until the market reaches equilibrium where quantity demanded equals quantity supplied, and the price ends up lower than before. So the likely effect is a fall in price. Upward pressure on price would worsen the surplus, keeping the price same would leave the surplus unresolved, and a negative price isn’t realistic in this context.

Excess supply occurs when at the current price, producers want to sell more than buyers want to buy. To clear this oversupply, sellers have an incentive to cut prices. Lower prices encourage more people to buy (so quantity demanded rises) and can discourage production or reduce the quantity supplied, narrowing the surplus. The process continues until the market reaches equilibrium where quantity demanded equals quantity supplied, and the price ends up lower than before. So the likely effect is a fall in price. Upward pressure on price would worsen the surplus, keeping the price same would leave the surplus unresolved, and a negative price isn’t realistic in this context.