Supply and Demand Equilibrium
By Jodi Beggs, About.com Guide
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Market Forces Result in Economic Equilibrium
Conversely, consider a situation where the price in a market is higher than the equilibrium price. If the price is higher than P*, the quantity supplied in that market will be higher than the quantity demanded at the prevailing price, and a surplus will result. (This time, the size of the surplus is given by the quantity supplied minus the quantity demanded.) When a surplus occurs, firms either accumulate inventory (which costs money to store and hold) or they have to discard their extra output. This is clearly not optimal from a profit perspective, so firms will respond by cutting prices and production quantities when they have the opportunity to do so. This behavior will continue as long as a surplus remains, again bringing the market back to the intersection of supply and demand.