Question

When market price is above equilibrium price, the market price will be driven (LO6) a) up by unhappy buyers b) up by unhappy sellers c) down by unhappy buyers d) down by unhappy sellers

Short answer

The short answer is: When the market price is above the equilibrium price, the market price will be driven down by unhappy buyers.

Step-by-step solution

Identifying market price and equilibrium price

Market price is the price at which a good or service is currently being sold in the market. Equilibrium price is the price at which the quantity demanded by buyers equals the quantity supplied by sellers. In other words, it is the price at which the market balances.

Scenario: Market price above equilibrium price

When the market price is above the equilibrium price, it means that the product or service is being sold at a higher price than what the market deems fair. In this situation, sellers are happy because they receive more for their goods or services, but buyers are unhappy because they need to pay more than they think the good or service is worth.

Analyzing buyer and seller behavior

Unhappy buyers, who think the price is too high, will not be willing to buy at the current market price. This will lead to a decrease in the quantity demanded. On the other hand, sellers who are content with the higher market price will continue to supply at this level, leading to a surplus in the market.

Impact on the market price

The surplus in the market created by the imbalance between supply and demand will cause sellers to lower their prices in order to sell their goods or services. As a result, the market price will start to decrease until it reaches the equilibrium price, where the quantity demanded equals the quantity supplied.

Choosing the correct answer

Based on the analysis of buyer and seller behavior, the correct answer is: c) down by unhappy buyers

Key concepts

Market Price

The market price is the value at which a product or service is traded in the market at any given time. Unlike the equilibrium price, which ideally balances supply and demand, the market price can fluctuate due to various factors.

Factors affecting market price include:

• Changes in consumer preferences
• Increases or decreases in production costs
• Government policies such as taxes or subsidies
• Macroeconomic conditions such as inflation

The market price will continue to adjust in response to these dynamics until it potentially settles at an equilibrium, where both buyers and sellers agree on the price point for exchanging goods or services. If the market price strays too far from this equilibrium, it typically results in a surplus or shortage, prompting further changes.

Quantity Demanded

Quantity demanded refers to the total amount of a product that consumers are willing and able to purchase at a given price. This concept is deeply influenced by the pricing of goods and services in the market.

• An increase in market price generally leads to a decrease in quantity demanded.
• A decrease in market price can lead to an increase in quantity demanded.

Other factors that could affect quantity demanded include consumer income, tastes and preferences, and prices of related goods (such as substitutes and complements).

When market prices are above equilibrium, the quantity demanded typically decreases because consumers are not willing to pay the higher prices. This creates a gap that often leads to a surplus of goods in the market, thus pushing prices downwards until equilibrium is restored.

Quantity Supplied

Quantity supplied is the amount of a certain good or service that producers are willing and able to sell at a specific price. This concept is significant in understanding how markets react to price changes.

• As market prices rise, the quantity supplied usually increases, since producers are eager to capitalize on higher prices.
• Conversely, as prices drop, suppliers might reduce the quantity they want to sell due to lower profit margins.

Suppliers base their decisions on production costs, technological advancements, and other economic conditions.

In situations where the market price exceeds the equilibrium price, producers might be encouraged to supply more than what consumers are willing to purchase, leading to an excess supply or surplus. This surplus exerts downward pressure on prices until they align with the equilibrium, restoring balance between quantity demanded and quantity supplied.