The Market Mechanism

On the other hand, what would happen if the price was set at a point which is above the equilibrium? Once again, we would see that the normal course of events would actually result in a return to equilibrium. In the beginning, the market might look something like this:

In this case, we can see that at $6.00 suppliers were willing to commit enough resources to this item to provide us with 1000 units. However, at that price, consumers were only willing to purchase 800 units, and so there were 200 units that remained unsold. In Economics, we would say that the quantity supplied is greater than the quantity demanded. This would be expressed as:

QS > QD

The reaction to this situation is obvious. As the suppliers now have excess stocks, they will work to clear the remainder. The best way to clear excess stock is to lower the price. In addition, they will know that in future they can not sell 1000 units, and so the quantity supplied will be lower in future.

In other words, we will see the following situation:

As both the price and the quantity supplied contract, the market will automatically move towards equilibrium once again.

From this we can conclude that when the price is set above the equilibrium point there will be a surplus in the market. However this surplus will be temporary, as suppliers will respond to the actions of consumers (consumer sovereignty) and move towards equilibrium.

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