Abundant Inventory: Definition, Calculation Method, Sources, Effects
In the realm of economics, excess supply, also known as production surplus, overproduction, or oversupply, is a common occurrence that can have significant impacts on markets. This article aims to explain what excess supply is, how it arises, and its effects on prices.
Excess supply is essentially the difference between the quantity of goods suppliers are willing to sell and the quantity consumers are willing to buy at a given price, when supply exceeds demand. To calculate excess supply, you first need to identify the supply and demand functions for a specific market. These functions give the quantity suppliers and consumers are willing to transact at different prices.
Once you've identified these functions, choose a specific price at which you want to measure excess supply. Calculate the quantity supplied and the quantity demanded at this price, and subtract the latter from the former to find the excess supply. If the quantity supplied is less than the quantity demanded, you have excess demand instead.
When there is excess supply, it puts downward pressure on prices, causing them to fall until equilibrium is restored, where supply equals demand. This equilibrium price is found when the quantity supplied equals the quantity demanded.
For example, if the supply function is S(p) = 10p and the demand function is D(p) = 100 - 5p, at a price of p = 8, the excess supply would be 80 - 60 = 20 units. This indicates a surplus of 20 units at price 8, suggesting prices would likely drop to reduce excess supply.
High stocks with low utilization rates, abnormally increasing inventory levels, and continuously falling prices can all suggest excess supply in a market. On the other hand, longer rainy seasons, overinvestment in production facilities, and unexpectedly high rainfall can lead to increased supply, potentially causing excess supply if demand doesn't increase proportionately.
When excess supply occurs, producers face an increase in stocks and associated costs, forcing them to sell more and lower the selling price to stimulate demand. This is especially true for facilities aiming to achieve economies of scale, requiring large output production to spread fixed costs.
It's important to consider both production data and inventory when calculating excess supply. Imports and exports should also be considered as they come from both domestic and foreign sources.
Minimum wage policies can lead to excess labor supply and unresponsive producer wages, while the absence of a queue or waiting list can be a sign of excess supply. However, it's worth noting that the market mechanism (increased demand and decreased supply) will take place when the free market operates, but external interventions, such as price control by the government, can prevent the market from reaching a new equilibrium.
In conclusion, understanding excess supply is crucial for both consumers and producers to make informed decisions in the market. By recognising the signs of excess supply, one can anticipate price changes and adjust their strategies accordingly.
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