Why Does the Market Price Fall If It Is Above the Equilibrium Price?

Suppose the supply and demand curves are as shown in Figure 3-11 but the market price is above the equilibrium level of $3—say, $3.50. This situation is illustrated in Figure 3-12. Why can’t the price stay there?

Price Above Its Equilibrium Level Creates a Surplus The market price of $3.50 is above the equilibrium price of $3. This creates a surplus: at a price of $3.50, producers would like to sell 11.2 trillion BTUs but consumers want to buy only 8.1 trillion BTUs, so there is a surplus of 3.1 trillion BTUs. This surplus will push the price down until it reaches the equilibrium price of $3.

There is a surplus of a good or service when the quantity supplied exceeds the quantity demanded. Surpluses occur when the price is above its equilibrium level.

As the figure shows, at a price of $3.50 there would be more BTUs of natural gas available than consumers wanted to buy: 11.2 trillion BTUs versus 8.1 trillion BTUs. The difference of 3.1 trillion BTUs is the surplus—also known as the excess supply—of natural gas at $3.50.

This surplus means that some natural gas producers are frustrated: at the current price, they cannot find consumers who want to buy their natural gas. The surplus offers an incentive for those frustrated would-be sellers to offer a lower price in order to poach business from other producers and entice more consumers to buy. The result of this price cutting will be to push the prevailing price down until it reaches the equilibrium price. So the price of a good will fall whenever there is a surplus—that is, whenever the market price is above its equilibrium level.