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I've been reading up on Walras' Law and thought I understood it pretty well. However one of my friends asked me point blank what is an example of excess demand or excess supply is and I had some difficulty answering and realized I had no clue.

What are examples of excess demand and excess supply?

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  • $\begingroup$ Are demand and supply more practical for you? $\endgroup$ – Michael Greinecker Jul 17 '18 at 6:44
  • $\begingroup$ @MichaelGreinecker its the basics of price determination. I guess I don't know how we determine whether there is an excess or not? $\endgroup$ – EconJohn Jul 17 '18 at 12:35
  • $\begingroup$ If you know what demand is and what supply is, you know what demand minus supply is. There's nothing more to it. $\endgroup$ – Michael Greinecker Jul 17 '18 at 12:38
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Definition 1. Excess supply is supply minus demand.

Definition 2. Excess demand is demand minus supply.


Example 1. A baker posts a sale price of \$2 per loaf of bread.

At this price, he is willing to sell up to 300 loaves of bread (per day), but consumers are willing to buy only 200.

We say that quantity supplied and quantity demanded (at the price of \$2) are 300 and 200 and write $$S(\$2) = 300\text{ and }D(\$2) = 200.$$

Excess supply is then $$ES(\$2) = S(\$2) − D(\$2) = 300 - 200 = 100.$$ (If we'd like, we can also say that excess demand is −100.)


Example 2. A baker posts a sale price of \$1 per loaf of bread.

At this price, he is willing to sell up to 100 loaves of bread (per day), while consumers are willing to buy 250.

We say that quantity supplied and quantity demanded (at the price of \$1) are 100 and 250 and write $$S(\$1) = 100\text{ and }D(\$1) = 250.$$

Excess demand is then $$ED(\$1) = D(\$1) − S(\$1) = 250 - 100 = 150.$$ (If we'd like, we can also say that excess supply is −150.)


In the real world, the baker may not know precisely how many loaves of bread he's willing to sell at each and every price. Nonetheless, if it is the case that QS obviously greatly exceeds QD (or vice versa), he will either notice this and respond accordingly or go out of business.

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Excess demand is the function describing the amount of quantity demanded above quantity supplied at each price level. Mathematically, it is allowed to be negative (so then we have excess quantity supplied actually).

Remember that the Walrasian construct imagines an "auction" situation when transactions do not take place as long as the market doesn't clear. So somebody (the "walrasian auctioneer") "announces a price, and buyers declare their desired quantities at that price and sellers declare the quantities they want to sell at that price. If the sum of quantities demanded exceeds the sum of quantities supplied, the excess demand function is strictly positive at that price.

A classic case of real-world strictly positive excess quantity demanded is a very large discount a shop may give for an item, but having decided a priori the pieces it will sell at that prices (the desired quantity supplied at the price). The price may be so low that customers may demand more than the quantities that the store desires to sell at that price.

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