Excess supply is a situation when the supply of a commodity in the market exceeds its demand at a particular price. In other words, if at any price level, all the consumers demand comparatively less quantity than what is being supplied by all the suppliers, then we face the situation of excess supply.

When the market demand exceeds the market supply at a particular price, then the situation that arises is excess demand. In other words, if at any price, the producers are willing to supply comparatively less than what is demanded by all the consumers in the market, then we face the situation of excess demand.

Market equilibrium is defined as the state of rest that is determined by the rational objectives of the consumers and the producers (i.e. maximisation of satisfaction and profit respectively). It is a state where the aggregate quantity that all the firms want to sell are purchased by consumers, i.e. market supply equals market demand. At this situation, there is no incentive or tendency for any change in quantity demanded, quantity supplied and price. That is: y^d = y^s

Equilibrium price is determined where market demand and market supply are equal. We can show this by the following table

In the table, when', the price of the good is very less, i.e. Rs 1 per unit then its demand is very high (100 units). However, no seller is ready to sell on this price and hence, supply is zero. Excess demand creates competition among the buyers and pushes the price up. When price is Rs 5 per unit, the quantity demanded is 60 units while quantity supplied is 40 units. Again, there is excess demand by 20 units. Price would continue to increase. When price is Rs 8 per unit, the quantity demanded is equal to the quantity supplied at 50 units. This price is called Equilibrium Price.
Similarly, when the price of the good is Rs 20 per unit then its supply is very high (100 units). However, no buyer is ready to buy on this price and hence, demand is zero. Excess supply Creates competition among the sellers and pulls the price down. When price is Rs 10 per unit, the quantity supplied is 60 units while quantity demanded is 30 units. Again, there is excess supply by 30 units. Price would continue to fall.

The main causes of a decrease in supply include. rise in input prices, technological degradation, government policy (taxes), etc. The chain of effects of a decrease in supply can be explained with the help of the following figure: 
     
Decrease in supply implies that less quantity is being supplied at the given price. The supply curve will shift to the left from SS to S₁S₁ This creates excess demand (EA) at price OP₀ . Excess demand creates competition among the buyers and pushes price up. Rise in price decreases the quantity demanded (from E to E₁) and increases the quantity supplied (from A to E₁).These changes continue till price rises to OP₁ . OP₁ is the new equilibrium price and OQ₁ is the new equilibrium quantity.

Market for a good is in equilibrium only when the demand for the good is equal to the supply of the good The main causes of an increase in demand include increase in the prices of substitute goods, decrease in the prices of complementary goods, increase in income and positive changes in hobbies.The chain of effects of an increase in demand can be explained with the help of the following numerical example:  

In the table above, the market is in equilibrium at price of Rs 5. At this price quantity demanded is equal to the quantity supplied at 50 units. Suppose at the price of Rs 5, demand increases from 50 to 80 units (say, due to increase in consumers' income), while supply remains the same at60 units. This gives rise to a excess demand of 30 units (80 - 50). Excess demand creates competition among the buyers and pushes the price 'up. The price, therefore, increases from Rs 5 to Rs 6. A rise in price induces the buyers to buy less, and thus, decreases the quantity demanded from 80 to 75 units. Also, arise in price induces the sellers to sell more, and thus, increases the quantity supplied from 50 to 60 units. These changes continue till price rises to Rs 7, where quantity demanded is again equal to the quantity supplied at 70 units. Thus, the new equilibrium price and quantity are Rs 7 and 70 units respectively. Both equilibrium price and equilibrium quantity have increased.

The main causes of an increase in demand curve include increase in the prices of substitute goods, decrease in the prices of complementary goods, increase in income and positive changes in hobbies An increase in the demand or a rightward shift in the demand curve leads to the situation of excess demand at the given price. Excess demand creates competition among the buyers and pushes price up. Thus, an increase in demand increases both the equilibrium price and the equilibrium quantity. 
          
In the diagram, when the demand curve shifts rightwards from DD to D₁D₁ excess demand is created (E₀A) at price OP₀ Since there is competition among the buyers due to shortage of good, the price will increase. Increase in price decreases the quantity demanded (from A to E₁) and increases the quantity supplied (from E₀ to E₁) These changes continue till price rises to OP₁ . OP₁ is the new equilibrium price and OQ₁ is the new equilibrium quantity. 

When the given price of a good is higher than the equilibrium price; there will be an excess supply of the good. The equilibrium price can be attained by reaching the point of interaction between market demand and supply curves. This can be explained with the help of the given diagram. 
                 
In This diagram, quantity is shown on X axis and price is shown on Y-axis. SS is the supply curve and DD is the demand curve. At the initial price of OP₁ , the quantity demanded is less than the quantity supplied (OQ₁2). There is an excess supply equal to Q₁Q₂ or AB Excess supply will create competition among the sellers and causes the price to fall. Fall in price increases the quantity demanded (from A to E₀) and decreases the quantity supplied (from B to E₀), These changes continue till price falls to OP_0. The equilibrium is attained at the point E₀ where the quantity demanded and quantity supplied are equal. OP₀ is the equilibrium price and OQ₀ is the equilibrium quantity.

When the given price of a good is higher than the equilibrium price; there will be an excess supply of the good. The equilibrium price can be attained by reaching the point of interaction between market demand and supply curves. This can be explained with the help of the given diagram. 
                 
In This diagram, quantity is shown on X axis and price is shown on Y-axis. SS is the supply curve and DD is the demand curve. At the initial price of OP₁ , the quantity demanded is less than the quantity supplied (OQ₁2). There is an excess supply equal to Q₁Q₂ or AB Excess supply will create competition among the sellers and causes the price to fall. Fall in price increases the quantity demanded (from A to E₀) and decreases the quantity supplied (from B to E₀), These changes continue till price falls to OP_0. The equilibrium is attained at the point E₀ where the quantity demanded and quantity supplied are equal. OP₀ is the equilibrium price and OQ₀ is the equilibrium quantity.