How does excess demand occur?

1. Price Below Equilibrium: Excess demand typically happens when the price of a good or service is set below its equilibrium level—the price where the quantity demanded equals the quantity supplied. This can result from government-imposed price controls (such as price ceilings) or businesses underestimating demand.
2. Sudden Increase in Demand: An unexpected rise in consumer preferences, seasonal trends, or increased income levels can sharply raise demand, outpacing the current supply, creating excess demand.
3. Supply Constraints: External factors such as natural disasters, production problems, or supply chain disruptions can limit the availability of goods while demand remains high, leading to a shortage in the market.

Impact of Excess Demand:

• Upward Pressure on Prices: Due to the scarcity of the good, sellers may raise prices to balance the market, moving closer to equilibrium.
• Black Markets: In cases where prices are artificially kept low, such as with price ceilings, black markets may emerge where goods are sold at higher prices.
• Long Queues or Rationing: Scarcity often leads to long lines or rationing as a way to distribute the limited supply among consumers.