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My question is regarding the image below:

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It says “given a surplus, the price will fall quickly toward the equilibrium level of 6 dollars” but there will still be a quantity left over if the price drops to the equilibrium price. For instance, if the quantity supplied is 35 million pounds (meaning there’s a surplus of 20 million pounds) and I drop the price to 6 dollars, then the quantity demanded will only be 25 million pounds. I will still have 10 million pounds left unsold. So why does it say the surplus will clear if I drop the price to the equilibrium price?

Assuming we start with a quantity supplied of 35 million pounds, what are the exact steps that happen that lead to this surplus being cleared?

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The \$8 price that results in a surplus under perfect competition is just a thought experiment. Strictly speaking, if the market price were \$8, then firms would not only produce 35 million pounds, but also sell 35 million pounds, since this is the definition of a market price. On the other hand, consumers would only demand 15 million pounds. So the surplus is sold, but not to consumers. This of course is a contradiction. It just shows that the market price cannot be \$8. For the same reason it cannot be any other price than \$6.

The model of perfect competition is an inherently static model and is not really fit to answer questions about what would happen if the market were not in equilibrium.

A related dynamic model might e.g. tell you that producers have to produce this period to be able to sell next period, so they have to estimate next period's demand, i.e. next period's market price, in advance. If they (wrongly) estimate this to be \$8 and therefore produce 35 million pounds, then in the next period they will only be able to sell everything if they considerably lower their price. (And here you are right, they would have to go below \$6.) They would then presumably adapt their estimate for the next period and eventually learn the true demand curve. Finally they will produce (and sell) the equilibrium quantity at the equilibrium price, and the static model takes over. But this story needs a more complex formal model and is not part of the standard model of perfect competition.

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At that $6 price you also wouldn’t be willing to produce those 35 million pounds of coffee, you would only produce 25 million pounds of coffee (as seen in the supply curve), the same quantity demanded.

Therefore, the surplus would actually clear.

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  • $\begingroup$ But I’m asking what happens AFTER I produce 35 million pounds of coffee, anticipating I’d be able to sell for 8 dollars, only to find out I miscalculated (a surplus) $\endgroup$ Jan 16, 2023 at 16:32

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