How do supply, demand, and price respond to a surplus?

A surplus means the price is above equilibrium, so sellers offer more than buyers want and unsold goods pile up. Sellers respond by cutting prices to clear their inventory. The lower price then changes behavior on both sides of the market at once. Buyers purchase more, which is an increase in quantity demanded, and sellers offer less, which is a decrease in quantity supplied. The price keeps falling as long as any surplus remains, and it stops at the equilibrium price, where quantity demanded equals quantity supplied.

Here is an illustration with made-up numbers. In a market for strawberries, quantity demanded is Qd = 800 - 100P and quantity supplied is Qs = 200 + 100P, in pints per day. Equilibrium is at $3, where both equal 500. At $5, buyers want 300 pints and sellers bring 700, a surplus of 400. When sellers cut the price to $4, buyers want 400 and sellers bring 600, so the surplus shrinks to 200. At $3 buyers want 500 and sellers bring 500, and the surplus is gone. Between $5 and $3, quantity demanded rose by 200 and quantity supplied fell by 200, so the gap closed from both sides.

The part students most often get wrong is the wording. During this adjustment neither curve shifts. The demand and supply equations above never changed; only the price did, and a change in a good's own price moves the market along its existing curves. So the correct answer is that quantity demanded increases and quantity supplied decreases. Saying that demand increases or supply decreases describes a shift of a whole curve, which takes a change in something other than the good's own price, such as income, input costs, or the number of sellers. The glossary entry on change in demand vs change in quantity demanded covers the distinction.

A surplus is often created by a shift, which is where the confusion starts. If demand for strawberries falls because a substitute gets cheaper, the demand curve shifts left and a surplus appears at the old price. That shift is the cause. The response to the surplus is still the same: the price falls, and the market moves along the new demand curve and the unchanged supply curve to a new equilibrium with a lower price and a lower quantity. On a free-response question, describe the shift first and the movement along the curves second.

The adjustment only happens if the price is free to fall. A binding price floor, such as a minimum price for a crop, holds the price above equilibrium, so the surplus persists instead of clearing. For both kinds of imbalance side by side, see shortage vs surplus; for why the price settles where it does, see market equilibrium explained; to size a surplus at any price, use the surplus calculator; and to see the curves and quantities for yourself, try the interactive supply and demand graph.