Prices and the occurrence of excess supply illustrate a strong correlation. When the price of a good is set too high, the quantity of the product demanded will be diminished while the quantity supplied will be enhanced, so there is more quantity supplied than quantity demanded. The occurrence of excess supply either leads to the lowering of the price or unsold supply, the latter reflecting excess supply. Lowering the price of a good encourages consumers to purchase more and suppliers to produce less.
Disequilibrium
A disequilibrium occurs due to a non-equilibrium price giving a lack of balance between supply and demand. Excess supply is one of the two types of disequilibrium in a perfectly competitive market, excess demand being the other. When quantity supplied is greater than quantity demanded, the equilibrium level does not obtain and instead the market is in disequilibrium. An excess supply prevents the economy from operating efficiently.
Market response to excess supply
Excess supply in a perfectly competitive market is the "extra" amount of supply, beyond the quantity demanded. As an example, suppose the price of a television is $600, the quantity supplied at that price is 1000 televisions, and the quantity demanded is 300 televisions. This illustrates that sellers are seeking to sell 700 more televisions than buyers are willing to purchase. Hence, an excess supply of 700 televisions exists, indicating that the market is in a state of disequilibrium. In this situation, producers would not be able to sell all the televisions they produce at the desired price of $600. This will induce them to reduce their price in order to make the product more attractive for the buyers. In response to the reduction in the price of the product, consumers will increase their quantity demanded and producers will not produce as many as before. The market will eventually become balanced as the market is transitioning to an equilibrium price and quantity.
Market spillovers
Excess supply in one market can affect supply or demand in another market. For example, when there is excess supply in the labor market—that is, unemployment—consumer-laborers will be constrained in their disposable income and hence will demand a smaller quantity of goods at any given price. This diminished goods demand resulting from a constraint in another market is known as the effective demand for goods.
