How can excess supply in a goods market be eliminated by market forces?

Answer 1

This is very straighforward.

An excess supply of a good implies that inventories have risen to a level higher than producers want to keep. When this happens, the producer(s) have two choices to bring inventory back into line. They can reduce the amount that they produce to a level below the level of sales until such time as the amount of excess inventory is corrected, or, alternatively, they can reduce their selling price in order to induce an increase in sales above their production rate so that the excess inventory is liquidated.

In a market where there are many producers, some will choose one method while others will choose the other, while some may choose a combination of both.

What is important to keep in mind is that not all producers may have the same "cost of production." The reduction in the selling price will make it unprofitable for some producers to remain in business. They can then choose to subsidize the losses in the hope that prices will return to the former level, or they can attempt to reduce their production costs by becoming more efficient.

Those producers that can not achieve a reduction in cost and cannot subsidize their losses eventually will be forced to go out of business. At that point, supple and demand will again be in equilibrium.