Question

What is excess demand’s impact on the equilibrium output and price?

Answer 1

Excess demand occurs when the quantity demanded exceeds the quantity supplied at a given price. This situation typically arises when the market price is lower than the equilibrium price. As a result, there is pressure on the price to rise. Buyers are competing for limited goods, which allows sellers to charge higher prices. The rising price acts as a signal to producers to increase their output, since higher prices mean more profit. At the same time, the increased price discourages some buyers, leading to a fall in quantity demanded. This process continues until the market reaches a new equilibrium, where demand equals supply. Therefore, excess demand causes both the price and output to increase until equilibrium is restored.