ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -When producers have a surplus of supply, they must sell the product at lower prices. Consequently, more consumers will purchase the product, now that it’s cheaper. This results in supply shortages if producers cannot meet consumer demand.

Detailed explanation-2: -Suppliers can’t afford to lower price because they still receive a greater revenue if they sell less products for a higher price and have a surplus. Since they can only sell a fewer number of their products, they will keep the excess supply in their storages.

Detailed explanation-3: -If a surplus exist, price must fall in order to entice additional quantity demanded and reduce quantity supplied until the surplus is eliminated. If a shortage exists, price must rise in order to entice additional supply and reduce quantity demanded until the shortage is eliminated.

Detailed explanation-4: -Whenever there is a surplus, the price will drop until the surplus goes away. When the surplus is eliminated, the quantity supplied just equals the quantity demanded-that is, the amount that producers want to sell exactly equals the amount that consumers want to buy.