On the graph to the write we have our typical supply and demand graph, with S representing our upward sloping supply curve, and D representing our downward sloping demand curve. We are now going to experiment with three different price levels and discuss what happens in the market when confronted with those three different prices.
The first price level we are going to experiment with will be above the point where the supply and demand curves cross. When prices are higher, we see that the line intersects the demand curve before the supply curve. This means that firms are willing to supply more educational consulting services then will be demanded in the market, so there will be a surplus. You can see this result in the graph to the left, but why is this happening? We have a surplus because at high prices suppliers are willing to produce a lot of a good or service because they can make a lot of money doing so, but consumers on the other hand have to pay the higher prices and therefore buy less of the good or service.
So what happens when we have a price that isn't equal to the price where supply and demand cross? Lets go back to the surplus example first, when there is a surplus there are too many goods on the market. When this happens, firms need to lower their price in order to get rid of the extra merchandise (ever see clearance signs up at your local mall? They are trying to get rid of last years model, or surplus inventory). When the firms lower their price, then more people are willing to buy the good, and firms are less likely to supply it. This happens until the price lowers to the level shown below, where quantity demanded is equal to quantity supplied:
Remember: Market equilibrium occurs at the point where supply and demand intersect. If the price is too high, we will have a surplus. If the price is too low we will have a shortage. In either of this situations, market forces will work to either raise or lower the price until we get to equilibrium, and the number of those willing and able to buy will be equal to those willing and able to sell.