CA Foundation · Business Economics · Theory of Demand and Supply
In a competitive market, the price of a commodity is currently below the equilibrium price. Which of the following is most likely to happen?
When price is below the equilibrium level, quantity demanded is greater than quantity supplied, so there is excess demand or a shortage. Buyers compete for limited goods and bid the price up, so the price tends to rise until it reaches equilibrium.
- AExcess supply emerges and price falls further
- BExcess demand emerges and price tends to riseCorrect
- CDemand curve shifts to the left until the market clears
- DSupply curve shifts to the right until the market clears
Explanation
At a price below equilibrium, quantity demanded exceeds quantity supplied, creating a shortage. Competition among buyers pushes the price up, moving along the curves towards equilibrium. Excess supply occurs only when price is above equilibrium, so the first option is wrong.
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