At a given price there is excess demand for a good. Explain how the equilibrium price will be reached. Use diagram.

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Solution

Excess demand is a situation where market demand exceeds market supply. In the given figure market demand is between Q(e) and Q2 i.e., Q1 to correct the situation of excess demand supply should be increased such or price should be increased to 8 so the quantity demanded is reduced and reached Q(e) level.

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