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CA Foundation · Business Economics · Theory of Demand and Supply

In a competitive market for a commodity, the market price is currently below the equilibrium price. Which of the following will happen, other things remaining the same?

When price is below equilibrium, quantity demanded exceeds quantity supplied, creating a shortage. Competing buyers bid the price upward, which reduces quantity demanded and raises quantity supplied until the two are equal at the equilibrium price. Excess supply and price cuts occur only above equilibrium.

  1. AExcess demand arises and competition among buyers pushes the price upCorrect
  2. BExcess supply arises and sellers cut the price
  3. CBoth demand and supply curves shift leftward until price rises
  4. DThe market stays at that price because quantity traded is fixed

Explanation

At a price below equilibrium, quantity demanded exceeds quantity supplied, so there is a shortage. Buyers compete for the limited stock and bid the price up. As price rises, quantity demanded contracts and quantity supplied expands until they are equal. Excess supply occurs only when price is above equilibrium.

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