This may seem like a basic question but it has been really bothering me for a while. I understand what excess supply is, and my question is regarding the firms' response to it.
All economics texbooks state that when there is excess supply
"there will be a downward pressure for firms to lower prices to the new equilibrium point".
I think this statement is not always true. I don't understand why firms always receive pressure to lower prices when there is excess supply.
For instance, if price elasticity of demand (demand elasticity) for the market is inelastic, lowering prices to get to the new equilibrium may actually lower the total revenue for the firm compared to the original price(where there was excess supply). In this scenario, I believe frims can definitely choose to simply maintain their prices at the excess supply level and ignore the stock that results from it, because the Total Revenue is higher compared to when firms lower the price to get to the new equilibrium.
So the question I wish to ask is, when there is excess supply, why are prices always lowered to the new equilibrium point where the quantity of demand increases and the quantity of supply decreases?
Why is there always a 'downward pressure' when, depending on the elasticity of demand, maintaining the price at the excess supply level can result in higher Total Revenue for the firm compared to when the price is lowered to the new equilibrium?
Every economics textbook I searched states that firms will always lower prices when there is excess supply, but I really don't get it, especially learning later on about Total Revenue, elasticity of D, etc in the later chapters of Microeconomics. As stated at the beginning, no matter how much I put my thought into it I could not come up with an answer. I would sincerely appreciate it if someome could give me a clear answer on this. :D