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A-Level Economics · AD/AS equilibrium diagram question
At the price level P₂ = 8, above equilibrium, this economy has…
The diagram
The answer
Excess supply of 6 — firms produce more than buyers will take, so the price level is bid down. Supplied 8 − demanded 2 = 6 of unsold output (the distance G to H). Unsold stock pushes the price level back down toward P₁. Above equilibrium, firms want to produce 8 (H) but buyers only take 2 (G) — excess supply of 6. Unsold output means firms cut prices and cut production, and the economy slides back down to E.
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