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A surplus occurs in a market when

A surplus occurs in a market when

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Answer #1

A surplus occurs in a market when there is excess supply.

If the price is increased from an equilibrium price, there would be excess supply, since at a higher price, producers are willing to produce more, but lower demand due to higher price. This is the scenario of a market surplus. The opposite is market shortage, where price is less than the equilibrium price, and the demand is more than the supply.

As can be seen, at market equilibrium, the equilibrium price is P* and equilibrium quantity is Q*. If price is increased to P1, the quantity demanded is Q1 and quantity supplied is Q2, and Q2>Q1. This is the case of market surplus. This forces the price to decrease to equilibrium price, where there is no excess supply.

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