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CMA Foundation · Fundamentals of Business Economics and Management · Theory of Demand and Supply

In the market for a commodity, the quantity demanded at the prevailing price is 800 units while the quantity supplied is 1,100 units. What is the likely market outcome?

There is excess supply of 300 units because quantity supplied exceeds quantity demanded. Unsold stock pushes sellers to cut prices, which raises quantity demanded and reduces quantity supplied until the market reaches equilibrium. Price therefore tends to fall, not rise.

  1. AExcess supply, so the price tends to fall towards equilibriumCorrect
  2. BExcess demand, so the price tends to rise towards equilibrium
  3. CThe market is in equilibrium, so the price stays unchanged
  4. DShortage, so the price tends to rise until supply falls

Explanation

Quantity supplied (1,100) exceeds quantity demanded (800), giving a surplus of 300 units. Sellers compete to clear unsold stock, so price falls. As price falls, quantity demanded rises and quantity supplied contracts until the two are equal. A rise in price would widen the surplus, so the shortage options are wrong.

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