What is oversupply?
An oversupply is an oversupply of products that results in less demand than supply and resulting in surplus.
- Oversupply is a situation in which more products are on the market than consumers want to buy.
- For commodities, oversupply is the period during which overproduction of a commodity pushes the price of that commodity down to the level at which the producer is losing money.
- Oversupply tends to be corrected by production cuts or discounts, which can occur for longer or shorter depending on the dynamics of the market.
- Oversupply can last longer if price and quantity are inflexible due to market conditions or government price controls.
Simply put, oversupply is when people are selling more products than they are ready to buy at their current prices. In a variety of situations, oversupply results in overproduction and leads to the accumulation of unsellable inventories. Price levels and oversupply are strongly correlated.
There are many reasons for oversupply. Some people are waiting for improved models in the series, such as smartphones from certain manufacturers, which can lead to oversupply of current products. Oversupply can also occur in situations where the price of a product or service is too high and people are simply willing to buy it at that price. Oversupply is also simply when the producer completely misunderstands the market demand for the product. Surplus is a synonym for oversupply.
If the price is too high, the demand will be less than the supply and the unsold will increase unless the producer discounts the goods or stops production. Product discounts are the most obvious way to deal with oversupply and are often the only way to clear unsold inventory, especially if new products are in the middle. Discounts affect the seller’s bottom line, and producers may have to agree to share the pain with the seller.
In the commodity market, oversupply is more of a market situation than a problem to be solved. For commodities such as oil, natural gas, precious metals and meat, the production timeline requires considerable lead time and all prices are market based. For example, if many large gas fields start production at the same time, there will be an oversupply of natural gas in the market and prices will fall. During periods of oversupply, producers may actually lose money on the units they sell.
The interesting thing about oversupply of some types of merchandise is not the issue of unsold inventory, but how much of the merchandise can be stored and stockpiled before it is finally sold at the price the market pays. Because production cannot be easily dialed up or down, commodity producers rely on storage to remove oversupply from the market while adapting to long-term demand with slower production cycles. Of course, if you reduce production too much, the market supply will be insufficient and more investment will flow to the production side. This is one of the many reasons why many commodities have periodic booms and bust price charts.
Example of oversupply
Oversupply and its impact on market equilibrium are best understood through examples. Suppose the price of a computer is $ 600 for a volume of 1,000, but the buyer only requests 300 at that price. In this situation, the seller is trying to sell 700 more computers than the buyer is trying to buy.
An oversupply of 700 units will imbalance the computer market. Not all computers can be sold at the desired $ 600 price, so sellers will consider reducing prices to make their products more attractive to buyers. Consumers demand more computers and producers cut production in response to product price cuts. Ultimately, without the introduction of other external factors, the market will achieve equilibrium prices and equilibrium quantities.
This process can occur quickly for some products if the prices and quantities available on the market are relatively flexible. The longer it takes to adjust prices and quantities in the market, the longer the oversupply will last. If prices are fixed due to menu costs or other issues, or if the government intervenes to set a minimum rate, oversupply of goods may continue or may continue for some time.