What Happens When Supply Exceeds Demands?
The law of supply and demand in economics indicates that a “surplus” exists when supply of a given product exceeds demand. If the supply of gum exceeds demand, for instance, resellers end up with excess inventory that they discount or throw out. A surplus also contributes to lowering prices because companies are competing for business, rather than consumers desperately trying to find an affordable option.
Supply typically exceeds demand because companies overestimate demand or conditions change too quickly for providers to adapt. Whether it is a manufacturer, distributor or retailer carrying the excess supply, the result is typically the same. The business with more supply than the market demands must discount its price to increase the level of demand. Lower prices often increase the level of demand for a given good. The problem is that discounting may lead to little or no profit.
A common follow-up to a scenario where supply exceeds demands is that companies overcompensate by reducing demand going forward or in the future. For instance, a business may order less of a good for the next season. Such a knee-jerk reaction may cause what is known as the bullwhip effect. If demand returns to normal levels, the industry or company may then suffer from a shortage, or inability to meet demand.