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How is equilibrium reached if there is excess supply at a price higher than equilibrium price ?

Answer» <html><body><p></p>Solution :Equilibrium price refers to the price at which market <a href="https://interviewquestions.tuteehub.com/tag/demand-436956" style="font-weight:bold;" target="_blank" title="Click to know more about DEMAND">DEMAND</a> is equal to market supply (i.e., there is no <a href="https://interviewquestions.tuteehub.com/tag/excess-978535" style="font-weight:bold;" target="_blank" title="Click to know more about EXCESS">EXCESS</a> supply). <br/> So, the price with excess supply is not an equilibrium price. <br/> In the <a href="https://interviewquestions.tuteehub.com/tag/diagram-950736" style="font-weight:bold;" target="_blank" title="Click to know more about DIAGRAM">DIAGRAM</a>, at `OP_(1)` level of price, `M_(2)M_(1)` is the excess supply. When the market supply is greater than the market demand, the <a href="https://interviewquestions.tuteehub.com/tag/competition-423521" style="font-weight:bold;" target="_blank" title="Click to know more about COMPETITION">COMPETITION</a> among sellers will bring price downwards. The quantity supplied tends to contract in response to the fall in price (law of supply) leading to movement (contraction) along supply curve SS, from point B to point E. At OP, quantity supplied contracts demand, leading to movement (extension) along demand curve DD, from point A to point E. <a href="https://interviewquestions.tuteehub.com/tag/thus-2307358" style="font-weight:bold;" target="_blank" title="Click to know more about THUS">THUS</a>, the quantity demanded rises from `OM_(2)-OM`. <br/> The equilibrium is at point E, with OP as equilibrium price and OM as equilibrium quantity. <br/> <img src="https://d10lpgp6xz60nq.cloudfront.net/physics_images/MIC_ECO_XI_U04_C11_E01_026_S01.png" width="80%"/></body></html>


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