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CA Foundation · Business Economics · Theory of Demand and Supply

In a competitive market for a commodity, the price is currently above the equilibrium level. Which of the following will occur?

A price above equilibrium creates excess supply, because sellers want to sell more than buyers want to buy. Unsold stock pushes sellers to lower prices, so price falls toward equilibrium. This is a movement along the existing curves, not a shift of demand or supply.

  1. AExcess supply emerges, putting downward pressure on priceCorrect
  2. BExcess demand emerges, putting upward pressure on price
  3. CThe demand curve shifts to the right until price is restored
  4. DThe supply curve shifts to the left until price is restored

Explanation

At a price above equilibrium, quantity supplied exceeds quantity demanded, creating a surplus. Competing sellers cut prices to clear unsold stock, so price falls toward equilibrium. The movement is along the curves, not a shift of either curve, so options on shifts are wrong.

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