Suppose Sri Lanka is an important producer of tea leaves in the global tea market. For a particular year, assume that favourable climate conditions in Sri Lanka result in a bumper crop of tea...

Suppose Sri Lanka is an important producer of tea leaves in the global tea market. For a particular year, assume that favourable climate conditions in Sri Lanka result in a bumper crop of tea leaves being harvested. Further, assume that the laws of demand and supply hold. Ceteris paribus, we would expect to observe:

An increase in equilibrium price and a decrease in equilibrium quantity

A decrease in equilibrium price and a decrease in equilibrium quantity

An increase in equilibrium price and an increase in equilibrium quantity

A decrease in equilibrium price and an increase in equilibrium quantity

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gsenviro | College Teacher | (Level 1) Educator Emeritus

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An excess supply of a product leads in general to lowering of price and increase in its desirability at low price.

In the given situation, favorable conditions lead to excess production of tea in Sri Lanka. This will lead to a market surplus, i.e. supply will exceed demand. In such a scenario, producers may not be able to sell all their tea and will lower the price to stay competitive in the market. These non-equilibrium conditions will lead to shift in equilibrium price and equilibrium demand.

In response to lower equilibrium price, as mentioned above, the consumers will be able to buy more tea, thereby increasing the equilibrium quantity. 

These changes in price and demand will continue until new equilibrium price and equilibrium demand is established.

Therefore, the excess supply will lead to "A decrease in equilibrium price and an increase in equilibrium quantity".

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