Question

Explain the chain of an effect of excess demand of a good on it equilibrium price.

Answer 1

Excess demand refers to a situation when quantity demanded is more than quantity supplied at the prevailing market price.

When the price is lower than the equilibrium market price of a good (OP^e), the price ceiling leads to the excess of demand. Now, the excess demand will increase the competition among consumers in the market. Thereby they consume the good at a higher price which leads to an increase in the price level, i.e. OP^e