EXCESS DEMAND (SHORTAGE)

There will be excess demand (shortage) at any price that is lower than the equilibrium price.

Study the following diagram and answer the questions:

What is the quantity demanded at R2?

It is 4 200.

What is the quantity supplied at R2?

It is 1 800.

Is there an excess demand or excess supply?

There is an excess demand.

Study the following diagram and answer the questions:

What is the quantity demanded at R3?

At R3 the quantity demanded is 3 600.

What is the quantity supplied at R3?

At R3 the quantity supplied is 2 400.

Is there an excess demand or excess supply at a price of R3?

Excess demand.

What happened to the excess demand as the price increases from R2 to R3?

As the price increases the quantity demanded decreases and the quantity supplied increases and the excess demand decreases

For example, at R2, the quantity demanded is 4 200, the quantity supplied is 1 800 and the excess demand is 4 200 – 1 800 = 2 400.

As the price increases to R3, the quantity demanded is 3 600, and the quantity supplied is 2 400, giving us an excess demand of 1200. As the price increases, excess demand becomes less and less. The arrows point upwards to show that the anxiety of buyers about buying the product will put upward pressure on the price. This trend will continue until an equilibrium position is reached at R4, where the quantity demanded = quantity supplied = 3 000.

Watch the following video clip for a graphical representation of the adjustment process in the event of an excess demand:

Activity

Study the following diagram and answer the questions:

  1. Equilibrium occurs at a price of R _______, where the quantity demanded is _______ and the quantity supplied is ______.
  2. At a price of R7, the quantity demanded is ______ and the quantity supplied is ______. There is therefore an (excess demand; excess supply) of ______, and the price will (decrease; increase).
  3. At a price of R5, the quantity demanded is _____ and the quantity supplied is ______. There is therefore an (excess demand; excess supply) of ______, and the price will (decrease; increase).
  4. As the price decreases, the quantity demanded (increases; decreases) and the quantity supplied (increases; decreases).
  5. At a price of R1, the quantity demanded is ______ and the quantity supplied is ______. There is therefore an (excess demand; excess supply) of _______, and the price will (decrease; increase).
  6. At a price of R2, the quantity demanded is ______ and the quantity supplied is ______. There is therefore an (excess demand; excess supply) of _______, and the price will (decrease; increase).
  7. As the price increases, the quantity demanded (increases; decreases) and the quantity supplied (increases; decreases).
Click to see the answer
  1. Equilibrium occurs at a price of R4 where the quantity demanded is 400 and the quantity supplied is 400.
  2. At a price of R7, the quantity demanded is 100 and the quantity supplied is 700. There is thus an excess supply of 600, and the price will decrease.
  3. At a price of R5, the quantity demanded is 300 and the quantity supplied is 500. There is thus an excess supply of 200, and the price will decrease.
  4. As the price decreases, the quantity demanded increases and the quantity supplied decreases.
  5. At a price of R1, the quantity demanded is 700 and the quantity supplied is 100. There is thus an excess demand of 600, and the price will increase.
  6. At a price of R2, the quantity demanded is 600 and the quantity supplied is 200. There is thus an excess demand of 400, and the price will increase.
  7. As the price increases, the quantity demanded decreases and the quantity supplied increases.

Study the following diagram and answer the following questions:

If the price is at P1, the price _______.




Think again.

P1 is higher than the equilibrium price and causes an excess supply which causes the price to fall.

Correct.

P1 is higher than the equilibrium price and causes an excess supply which causes the price to fall.

Think again.

Equilibrium occurs at P0

If the price is at P2, the price ______.




Correct.

P2 is lower than the equilibrium price and causes an excess demand which causes the price to rise.

Think again.

P2 is lower than the equilibrium price.

Think again.

Equilibrium occurs at P0

If the price is at Pe, the price ______.




Think again.

This happens when the price is P2.

Think again.

This happens at a price of P1.

Correct.

The quantity demanded is equal to the quantity supplied which is the market equilibrium.

Demand and supply schedule for a brand of soft drink

1 2 3 4 5
Price (rand) Quantity demanded Quantity supplied Excess demand/equilibrium/ excess supply Impact on prices
downward/
upward/neutral
10 100 900
9 200 800
8 300 700
7 400 600
6 500 500
5 600 400
4 700 300
3 800 200
Click to see the answer
1 2 3 4 5
Price (rand) Quantity demanded Quantity supplied Excess demand/equilibrium/ excess supply Impact on prices
downward/
upward/neutral
10 100 900 Excess supply Downward
9 200 800 Excess supply Downward
8 300 700 Excess supply Downward
7 400 600 Excess supply Downward
6 500 500 Equilibrium Neutral
5 600 400 Excess demand Upward
4 700 300 Excess demand Upward
3 800 200 Excess demand Upward