Explain the meaning of excess demand and excess supply with the help of a schedule. Explain their effect on equilibrium price.

Let us understand the meaning of excess demand and excess supply with the help of following schedule –

Equilibrium price means a price where the supply and demand are equal therefore in the given schedule the equilibrium price is 3 where both demand and supply are 30.

At the price of 1 and 2, the demand is more than the supply; this is the situation of excess demand and at the price of 4 and 5 the supply is more than the demand; this is the situation of excess supply.

Therefore –

Excess demand is a situation when the market demand exceeds the market supply of a commodity at a given price. In this situation the prices are increased up to the equilibrium level through extension of supply and contraction of demand.

Excess supply is a situation where the market supply exceeds the market demand for a commodity at a given place. In this situation the price is decreased up to the equilibrium level through extension of demand and contraction of supply.