1. Excess Supply
If the price is set too high, excess supply will be created within the economy and there will be allocative inefficiency.
If the price is set too high, excess supply will be created within the economy and there will be allocative inefficiency.
At
price P1 the quantity of goods that the producers wish to supply is
indicated by Q2. At P1, however, the quantity that the consumers want to
consume is at Q1, a quantity much less than Q2. Because Q2 is greater
than Q1, too much is being produced and too little is being consumed.
The suppliers are trying to produce more goods, which they hope to
sell to increase profits, but those consuming the goods will find the
product less attractive and purchase less because the price is too high.
2. Excess Demand
Excess demand is created when price is set below the equilibrium price. Because the price is so low, too many consumers want the good while producers are not making enough of it.
2. Excess Demand
Excess demand is created when price is set below the equilibrium price. Because the price is so low, too many consumers want the good while producers are not making enough of it.
