Question

When quantity supplied is greater than quantity demanded, (LO3) a) price will fall to its equilibrium level b) price will rise to its equilibrium level c) price may rise, fall, or stay the same, depending on a varicty of factors

Short answer

In the given situation where quantity supplied is greater than quantity demanded, there is a surplus in the market. This leads to competition among suppliers and causes a decrease in price. As the price falls, quantity demanded increases until it equals the quantity supplied, reaching a new equilibrium. Hence, the correct scenario is: a) price will fall to its equilibrium level

Step-by-step solution

Understand the concept of equilibrium in the market

Equilibrium is the point at which the quantity demanded by the consumers equals the quantity supplied by the producers. The equilibrium level is the price where this occurs, and it is the most efficient point for the market as there is no surplus or shortage of goods.

Analyze the given situation

We are given that the quantity supplied is greater than the quantity demanded. This means there is a surplus of goods in the market as suppliers have produced more goods than what the consumers are willing to consume at the current price.

Determine the impact on price when there is a surplus

When there is a surplus in the market, producers must find a way to sell their excess products. This typically leads to competition among the suppliers, and they lower their prices in order to sell the goods. As the price decreases, the quantity demanded increases until it is equal to the quantity supplied, and a new equilibrium is reached.

Choose the correct scenario

Based on the analysis in the previous steps, we can conclude that the correct scenario is: a) price will fall to its equilibrium level When the quantity supplied is greater than the quantity demanded, this creates a surplus that pushes the price downward, which in turn increases demand until equilibrium is reached.

Key concepts

Surplus

A surplus occurs in a market when the quantity supplied exceeds the quantity demanded at a given price. This means producers have more products than consumers are willing to buy. The existence of a surplus signals to producers that the price might be too high, prompting an adjustment. When there is a surplus in the market:

• Suppliers typically experience excess inventory.
• To attract more buyers, producers might reduce their prices.
• This drop in price can spur an increase in quantity demanded, reducing the surplus.

By lowering prices, suppliers aim to reach a point where the quantity demanded matches the quantity supplied, thus reaching equilibrium.

Quantity Demanded

Quantity demanded refers to the total amount of a product or service that consumers are willing and able to purchase at a specific price. It is a crucial concept for understanding consumer behavior. A few things to note about quantity demanded:

• It generally decreases when prices rise and increases when prices fall. This is due to the law of demand.
• It is affected by factors such as consumer income, tastes, and expectations.
• Changes in the price of related goods, such as substitutes or complements, can also affect quantity demanded.

Increasing quantity demanded in response to falling prices is essential for eliminating a surplus in the market.

Quantity Supplied

Quantity supplied is the amount of a good or service that producers are willing and able to sell at a particular price. This concept helps us understand producer behavior in a market. Here are some key points about quantity supplied:

• It typically increases as prices increase, due to the law of supply.
• Producers are motivated to supply more at higher prices because they can achieve better profit margins.
• Factors such as production costs and technological advances also impact quantity supplied.

A greater quantity supplied than quantity demanded can lead to a surplus, prompting producers to adjust prices to reach equilibrium.