When do we say there is excess demand for a commodity in the market?
When at a given price the market demand exceeds market supply then there is excess demand for a commodity in the market.
If price is below the equilibrium price then the demand will be greater than supply, due to which there will be shortage.
If there is shortage, the firm will increase the prices as well as supply. With rise in price there will be movement along the demand curve and the demand will fall.
In the given graph at equilibrium price P the demand was Q, now when the price falls to P0 the demand increases to Q1, which is greater than supply so there is a shortage in supply ranging from Q to Q1. To meet this demand, the price is raised from P0 to P1 due to which the demand falls from Q1 to Q0