When the quantity firms supply is greater than the quantity customers want to buy. This is resolved when firms reduce prices to sell off excess supply. Lower prices discourage supply and encourage demand until the excess is removed.
Below is a diagram to illustrate how excess supply arises in a market. In this instance an increase in supply without an accompanying increase in demand will lead to supply exceeding demand and this causes the price to fall to P1 in order for the equilibrium to be restored.
