Question

What is a surplus? Define, illustrate (graph) , and discuss how the market will return to equilibrium

Answer 1

A market surplus occurs arises when the quantity supplied exceeds the quantity demanded, thus causing an excess supply. When surplus occurs, price must decline in order to entice an additional quantity demanded and to decrease the quantity supplied until there is an elimination of the surplus. In the enclosed graph the equilibrium is at $6 and at 20 units. When price exceeds $6 and it reaches $8 it causes a surplus; now the prices will drop due to the surplus. Once the price of the product are reduced, the quantity demanded of the product will increase until an equilibrium is reached