A Level Economics AQA Practice Exam

What is characterized as excess supply?

1. When demand exceeds supply

2. The situation when quantity supplied is less than quantity demanded

3. The amount by which quantity supplied exceeds quantity demanded at a given price

4. Quantity demanded equals quantity supplied

The correct answer is: The amount by which quantity supplied exceeds quantity demanded at a given price

Excess supply occurs when the quantity supplied in a market is greater than the quantity demanded at a particular price point. This situation leads to a surplus of goods, as suppliers are unable to sell all of the products they have available at that price. Thus, the correct characterization highlights the difference between the amount that is supplied and the amount that is demanded. Understanding this concept is important for analyzing market dynamics. For instance, when there is excess supply, businesses may need to reduce prices to increase sales, ultimately bringing the market back toward equilibrium, where supply equals demand. Recognizing this condition is crucial for firms in making production and pricing decisions, as it directly affects their revenue and inventory management.