bushel, there is a shortage of apples because the quantity demanded
exceeds the quantity supplied. This is a situation of excess demand
prices greater than $60 per bushel, there is a surplus of apples because
the quantity supplied exceeds the quantity demanded. This is a situation
of excess supply. This same story can also be told in graphical terms.
The quantities demanded and supplied at any price can be read off the
two curves; the excess supply or excess demand is shown by the
horizontal distance between the curves at each price.
To examine the determination of market price, let’s suppose first that the
price is $100 per bushel. At this price, 95 000 bushels are offered for sale,
but only 40 000 bushels are demanded. There is an excess supply of 55
000 bushels per year. Apple sellers are then likely to cut their prices to get
rid of this surplus. And purchasers, observing the stock of unsold apples,
will begin to offer less money for the product. In other words, excess
supply causes downward pressure on price.
Now consider the price of $20 per bushel. At this price, there is excess
demand. The 20 000 bushels produced each year are snapped up quickly,
and 90 000 bushels of desired purchases cannot be made. Rivalry
between would-be purchasers may lead them to offer more than the
prevailing price to outbid other purchasers. Also, sellers may begin to ask
a higher price for the quantities that they do have to sell. In other words,
excess demand causes upward pressure on price.
Finally, consider the price of $60. At this price, producers want to sell 65
000 bushels per year, and purchasers want to buy that same quantity.