VIDEO: Calculate the supply surplus

As a future entrepreneur who wants to produce an asset, you should watch the market closely. It is particularly important to calculate whether there is already an excess supply.

How to calculate an excess supply

• A supply surplus always arises when the production of an asset is higher than the demand. In such a case, you could only sell a commodity at a reduced price.
• You can calculate the excess supply using the following formula: Aü = Xa - Xn. AÜ stands for excess supply, Xa is the supply quantity and Xn is the supply demand.
• This formula should be clarified using an example. Imagine that you are an entrepreneur and produce 1,000 items per day. But only 650 pieces of the article are sold. Then you could calculate the excess supply as follows: Aü = 1000 - 650. The result is 350. In this example, the excess supply is 350 pieces per day.

Draw the right conclusions from an excess supply

• You can safely tolerate a small excess supply. This means that if the demand for the product suddenly increases, there are always some reserves available. Of course, this only applies to goods that do not spoil after a short time. For example, with food you should always try to keep the market balance.
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• But even with so-called non-food products, excess supply can lead to lower profits. Production costs continue to run and sales stagnate. In addition, there are storage costs for goods that are not sold. Therefore, if there is a large excess supply, you should act immediately.
• For example, you could reduce the sales price for a limited period of time. This could allow you to sell inventory.
• In the long term, however, you have no choice but to lower the selling price or shut down production a bit. You should carefully calculate which alternative is best for your company.

Calculating an excess supply is extremely important for all manufacturing companies. A company can only remain successful in the long term if supply does not exceed demand.