As discussed previously, the equalization of supply and demand will generate the so-called market-clearing levels of price and production. However, what would occur if price for example was set above this optimal level?

In the chart below, the equilibrium price is equal to P, while the optimal level of production is equal to Q. However, if prices were set higher at P1 (because of government price policies designed to support the agricultural sector for example), then this would result in the quantity supplied being equal to Qs, while the quantity demanded would be equal only to Qd. This would clearly lead to oversupply, as production levels exceeded the actual level of overall demand.

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