Wikipedista:Coohy/Excess supply

Causes

The main case is probably that suppliers can not perfectly predict the market (unpredicteble events, which leads to changes of supply or demand). Even perfect screening of market is not possible.

Another problem which lead to excess suply is that supliers are not able to quicly adapt to new situations. Suppliers have large stocks of goods and they can not sell it with old price all. They can not usually event immediately change volume of production, especially if production proces is really long.

Here are some examples of why demand may decline and thus excess supply is created:

• financial, economic crisis - people are scared and thus they spent less money and it automatically deepens the crisis
• deflation - people think that they will be able to buy more for the same money in the future (deferred consumption) and thus it causes probably short term excess supply
• products are forgotten quickly or they quickly become unpopular so the demand drop in the moths or weeks

Here are some examples of why suply may raise and thus excess supply emerge:

• weather - for example excellent weather results in excellent harvests or sunny and windy days can lead to excess supply in electricity (typical for smaller regions in Australia)
• cheap labor or free (autonomous) production
• excessive production support (for example from government)
• new technologies, which can be a product with old one's machine. We can see this problem in the world of mobile phones and many other devices, Lot of parts of this device is made up on the same production line with just setting machines on different settings. Those devices are sold at high prices because it is hot new so the demand on it is not so high on the other hand producer can mad a lot of them.
• Instant increase of production (usually hold for small monopoly markets with one manufacturer which upgrade his production line)

Symptomps

According to Steven Ricchiuto if the economy is stuck in a rut of excess supply, then slow growth and deflation will persist.

Consequences

One of the possible consequences is that producers need to lower their prices, which may lead to that they lower wages or they fire some employee. On a global scale if there is excess of supply (globally) then most people get less money and they can buy even less, so the excess of supply gets even worse, luckily as goes time producers will lower their production to get the market to equilibrium. If the production can not be reduce as quickly it can lead to economic crises, which will be more dangers for global economy.

Example

Assume ice cream seller and he is expected that next week will be a beautiful sunny week so he made up resources for that. But unfortunately, his weather forecast is wrong and next week is really cold. The change of the weather leads to an instant change of demand and it changes the equilibrium of the market. Our ice cream seller needs to sell the ice cream for a high price, higher than the current equilibrium, so iit is an excess of supply.

Prevention of Excess supply

The best way how to prevent excess supply is to find an optimal production plan for the specific products for example based on historical data. As in the above example with ice cream sell note X_t the count of scoops that ice creamer sold in the t-th week of the year. For future times is X_t random process. We can figure out the probability distribution of X_t based on historical data. If in previous years were sold 53,56,55,57 scoops in week 27 it's not really probably that in 27th week this year will sell over 100 scoops. One of the ways how to estimate how much ice cream prepare for next week is to do the mean of historical values. Another approach is to extrapolate the data 53,56,55,57 for example using some regression. The best way is surely to maximize expected profit. In this case, we also need to estimate the probability distribution of the count of scoops that will be sold next week.

On the other hand (if we talk about demand) encouraging customers to buy things, for example, sales are a great instrument that allows sellers to reduce inventory as well as other marketing techniques such as 2+1, black fridays and night shopping.

Generally, if we look at theorems in paragraph causes and we improve them or reverse them it helps to avoid excess supply, so financial and economic stability contributes to stable demand so as inflation (money yesterday have less value so it's better to spend them today).

Finally if it's possible to make production more flexible,

According to Steven Ricchiuto individual states solve excess supply with devaluing their currency in hopes that they can push the problem of excess capacity onto the country with the strongest currency.

Excess supply in the second decade of 21th century

“The dynamics of supply and demand have shifted,” Ricchiuto said in an interview. The central bank is trying to manage the economy as if excess demand were still the major problem it was in the 1970s and 1980s. But today’s global economy suffers from a different imbalance, Ricchiuto says: Excess supply.