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CMA Foundation · Fundamentals of Business Economics and Management · The Fundamentals of Economics

In a competitive market for tea, the price is currently below the equilibrium price. Which of the following is most likely to occur?

When price is below equilibrium, quantity demanded exceeds quantity supplied, creating a shortage. Buyers compete for limited goods and bid the price upward, which continues until quantity demanded equals quantity supplied at the equilibrium price. A surplus and falling price occur only above equilibrium.

  1. AQuantity supplied exceeds quantity demanded, so price falls
  2. BQuantity demanded exceeds quantity supplied, so price tends to riseCorrect
  3. CQuantity demanded equals quantity supplied, so price stays unchanged
  4. DBoth demand and supply curves shift to the left immediately

Explanation

At a price below equilibrium, buyers want more than sellers offer, creating excess demand (shortage). Competition among buyers pushes the price up until demand equals supply. The option showing a surplus describes a price above equilibrium, so it is wrong.

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