Excess demand is a situation in which, for a given price, the amount that consumers want to buy is greater than the stock offered by sellers.
In other words, when there is an excess of demand, the established price (p *) corresponds to Q1 in the supply curve . Meanwhile, it coincides with Q2 in the demand curve .
Also, Q2 is greater than Q1 and there is no market equilibrium , as we can see in the following image:
This can be applied in a specific market or sector or to the whole aggregate of the economy.
Characteristics of excess demand
The main characteristics of excess demand are:
- The price is lower than the balance in perfect competition .
- A situation of scarcity is generated.
- The opposite circumstance is excess supply .
- It is an imbalance where the market does not reach its highest efficiency point.
- Neither the plaintiffs nor the bidders obtain the maximum possible benefit .
- In perfect competition, all demand is covered by bidders. In case of shortage, the market will be corrected only with a price increase. Thus, the quantity demanded will decrease and the offered stock will rise.
- One of its most common causes is that the government establishes a price for a product (fixed or maximum), and this is lower than the market equilibrium.
- Losses occur in consumer and producer surplus . This, regarding a competitive market situation.
Consequences of excess demand
The main consequences of excess demand are:
- Black markets appear where the public can get that product that is in short supply. However, they must pay a higher price than the formal market.
- Given the insufficient stock, one option is to resort to rationing tools. For example, it may be provided that buyers queue to deliver the product in order of arrival.
- Suppliers have greater bargaining power.
Example of excess demand
Suppose that the State, as part of its price control, decrees that rice should cost a maximum of US $ 0.5 per kg. In turn, the market equilibrium is at US $ 0.7 per kg.
This generates a situation of shortages because the bidders bring only 9,000 kg of rice to the market. However, consumers want to buy 10,000 kg.
In conclusion, the government intervention generated an excess demand of 1,000 kg. This difference could be covered, for example, in a parallel market where a higher price is charged