How can excess supply occur?

1. Price Above Equilibrium: Excess supply often arises when the price of a good or service is set above the market equilibrium price—the price at which the quantity supplied equals the quantity demanded. When prices are too high, consumers are less willing to buy, leaving unsold goods.
2. Increased Production with Stable Demand: If producers significantly increase output, either due to technological improvements, optimistic forecasts, or new market entrants, but demand remains constant or decreases, it results in excess supply.
3. Subsidies or Price Supports: Government interventions, like agricultural subsidies or price floors (minimum prices), can cause excess supply by encouraging producers to supply more than consumers are willing to purchase at the given price.

Likely Effects of Excess Supply

• Downward Pressure on Prices: To clear the surplus, producers may lower prices, which can eventually bring the market closer to equilibrium.
• Waste or Stockpiling: If prices don't adjust or demand remains low, excess supply can lead to the accumulation of unsold goods, sometimes resulting in waste, especially in perishable goods like food.
• Market Exit: Prolonged excess supply can force businesses out of the market if they are unable to sell their goods, leading to reduced competition and potential job losses.

Topical Real-World Examples

1. Oil Market (2020 COVID-19 Crisis): During the early stages of the COVID-19 pandemic, oil producers continued to pump large amounts of crude oil, but demand dropped sharply due to lockdowns and reduced travel. This created a massive excess supply, leading to a significant drop in oil prices. At one point, oil prices turned negative as storage capacity filled up, and producers were forced to pay buyers to take the excess supply off their hands.
2. Housing Markets in Some Regions: In certain areas, particularly in places like China, there have been instances of over-construction of residential properties. Developers built more homes than there was demand for, leading to "ghost cities"—large urban developments with very low occupancy rates, reflecting an excess supply of housing relative to demand.
3. Agricultural Surpluses (U.S. Farm Products): In the U.S., government agricultural subsidies sometimes result in farmers producing more crops than the market demands. For example, there have been cases of excess supply of crops like corn, where subsidies encourage overproduction. As a result, prices drop, and the government sometimes buys and stores the surplus, or farmers are forced to sell at reduced prices, leading to wastage or exportation at low margins.

In each of these cases, excess supply caused significant market disruptions, requiring either price adjustments or government interventions to restore balance.