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Excess Demand exists if at a particular price the amount of a good demanded exceeds the amount supplied, i.e. people want to buy more of the good at a particular price than people want to sell at that price. . Excess Supply exists if at a particular price the amount of a good demanded is less than the amount supplied. i.e. people want to sell more of the good at a particular price than people want to buy at that price. Understanding how the forces of Excess Supply or Excess Demand move a market to equilibrium in the real world involves imagining how suppliers and demands (sellers and buyers) will act to make themselves richer and happier when the price is above the equilibrium price (Excess Supply) or below the equilibrium price (Excess Demand). At a price of $8, Suppose Cartoon is the only seller able to find buyers. 12 -Market Supply Market Demand 20 30 40 O) Cartoon is selling 2 units to Gob. O Cartoon is selling 2 units to Fon. na....O Oiy didn't find any buyers when the price was $8 but would be willing to sell even if the price were $7 O If the price dropped from $8 to $7, Oly would be willing to buy a 2nd unit of the good. O If the price dropped from $8 to $7, Boom would be willing to buy a 2nd unit of the good. O If the price dropped from $8 to $7, Gob and Yam would each demand an additional unit of the good. ( Oly didn't find any buyers at price of $8 and would still be willing to sell even if the price dropped to $7. There is an opportunity for mutual beneficial trade between Oly and Gob at a price of $7. There is an opportunity for mutual beneficial trade between Oly and Yam at a price of $7. O In the real world, economic theory predicts markets will move to equilibrium where supple equals demand. () In this example, there is excess supply at a price of $8. O) Excess supply means more units of the good are offered for sale than people are willing to buy at that price. ) At a price of $8, there are buyers who didn't want to buy at $8 but would buy if the price were $7. )There are sellers who didn't find a buyer at $8 who would still be willing to sell at a price of $7. There are buyers and sellers who make themselves better off if thery transacted at a price of $7. )We would predict that the price would fall from $8 to $7 because it in the personal self-interest of buyers and sellers to trade at prices lower than $8. O) This process would continue until there are no longer any buyers and sellers will to trade at lower prices, Le. we would be at the point where supply equals demand