Is it possible for a decrease in demand to create a surplus? In that the old...

Is it possible for a decrease in demand to create a surplus? In that the old quantity supplied would be greater than the new quantity demanded? Or would surplus not apply to this sort of situation?

Expert Solution

Answer to the question:

If the demand decreases, the demand curve will shift to the left. Given the previous equilibirum price level, there will create a surplus in the market where the quantity supplied is greater than the quantity demanded. In this situation, the old quantity demanded will be greater than the new quantity demanded. For simplicity, let us understand using the following diagram:

Suppose the initial equilibrium is at point E1 where the demand (DD1) is equal to the supply (SS). At this level, the equilbrium price is P1 and the equi.ibirum quantity is ON. Now suppose due to some factors like change in taste and preference of the consumers or the change in the price of the related goods the demandfor the commodity shift to the left from DD1 to DD2. This will shift the new equilibrium point from E1 to E2. Corresponding to this level the equilibrium price is OP2 and the equilibrium quantity is OR.

But, in the short-run, the price do not adjust immidiately but after sometime. When the demand dcreases from DD1 to DD2, the demand falls short of the supply by TE1 amount. This is the surplus in the short-run created in the market due to fall in the demand. In the long run, the price will adjust in such a way thet the DD2 equals the SS where the new equilibrium price will be OP2 and the equilibrium quantity will be OR.

When there is excess supply in the market that means the consumers are demanding less. The consumers will now try to pay less since there is excess supply. So, producers will find that they have to reduce there supply such that it becomes equal to the demand. And in long run, after so many adjustments, the equilibrium reaches.

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Rahul Sunny answered 1 year ago

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