Question 3 of 22beginner🧠 RememberShort Answer2 marks

When do we say there is excess supply for a commodity in the market?

Correct Answer

There is said to be excess supply in the market when, at a given price, the market supply is greater than the market demand. In this situation, the quantity that firms want to sell exceeds the quantity that consumers want to buy.

This condition typically occurs when the prevailing market price is greater than the equilibrium price (p∗p^*). Algebraically, excess supply is calculated as ES(p)=qS−qDES(p) = q^S - q^D. For any price above the equilibrium price, excess supply will be positive.

Exercise: EXERCISES | Q: 3 | (Page 16)
For More Understanding

Explanation

The answer is derived from the explicit definition provided in the text, which states that excess supply exists 'If at a price, market supply is greater than market demand.' Additionally, the context explains that this phenomenon occurs at prices higher than the equilibrium price (p∗p^*), supported by the algebraic example where qS>qDq^S > q^D at price p2=45p_2 = 45 (which is greater than p∗=40p^* = 40).

Solution Steps

  1. Step 1: Define excess supply as the situation where market supply exceeds market demand at a specific price.

  2. Step 2: Relate this condition to the price level, noting that it occurs when the price is greater than the equilibrium price.

  3. Step 3: Present the algebraic expression ES(p)=qS−qDES(p) = q^S - q^D to show the calculation.

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