Question

When quantity demanded is greater than quantity supplicd. \((1.03)\) a) market price will rise b) market price will fall c) market price will stay the same

Short answer

When quantity demanded is greater than quantity supplied, there is a shortage in the market. This shortage creates upward pressure on the price, driving it to increase until equilibrium is reached, where quantity demanded equals the quantity supplied. Therefore, the correct answer is (a) market price will rise.

Step-by-step solution

Understand the Principle of Supply and Demand

In economics, the principle of supply and demand helps to determine prices in the market. "Quantity demanded" is the amount of a good buyers are willing and able to purchase at the current price, while "quantity supplied" is the amount of a good sellers are willing and able to sell at the current price.

Identify Market Condition

In this exercise, the condition is given: quantity demanded is greater than quantity supplied. This represents an imbalance in the market, or specifically, a shortage—there is more demand for the good or service than there is available supply.

Consider Effect on Price

When there is a shortage in the market, sellers will notice that they could potentially sell more of their product. Because of this, they are likely to increase the price of the good or service until a state of equilibrium is reached. Equilibrium is the state where the quantity demanded equals the quantity supplied.

Analyze Answer Options

Having understood the above principles, the possible options can now be analyzed: a) Market price will rise: This is possible because due to the shortage, sellers will try to maximize profits by increasing prices. b) Market price will fall: This is contrary to the principles of supply and demand analyzed above. c) Market price will stay the same: This is unlikely, as the imbalance in supply and demand will tend to drive changes in price.

Select Correct Option

Based on the above analysis, the most likely outcome in this scenario is (a) the market price will rise. This is because when the demand for a good is higher than its supply, the price tends to rise until an equilibrium is achieved.

Key concepts

Market Equilibrium

In economics, market equilibrium is a key concept describing a state where the quantity of a good or service demanded by consumers is equal to the quantity supplied by producers. This balance between supply and demand ensures that there is no leftover surplus or unmet demand in the market. At equilibrium, the market price is considered stable, as both buyers and sellers are satisfied with the quantity exchanged and the price paid.

Understanding market equilibrium can be visualized with a supply and demand graph. The point where the supply curve intersects the demand curve represents the equilibrium price and quantity. If the market price is above this point, a surplus occurs leading to downward pressure on the price. Conversely, if the price is below equilibrium, a shortage occurs causing the price to rise, as in the textbook exercise where quantity demanded exceeds quantity supplied. To reach equilibrium again, adjustments in price or quantity need to occur.

Price Determination

Price determination is the process through which the price of a good or service is set in the market. It involves a dynamic interaction between buyers and sellers, with supply and demand playing pivotal roles. Prices are not static; they vary according to changes in consumer preferences, production costs, and external economic conditions.

Prices act as signals to both consumers and producers. A high price typically signals a good might be scarce or in high demand, encouraging producers to increase supply. Conversely, a low price might indicate abundant supply or low demand, prompting consumers to purchase more. The equilibrium price, therefore, emerges from the continual push and pull between supply and demand forces. Over time, as these forces change, the equilibrium price will adjust, reflecting new economic realities and maintaining balance in the market.

Shortage and Surplus

Shortages and surpluses are situations that occur when the market is not in equilibrium. A shortage exists when the demand for a product exceeds the supply at a given price, leading to upward pressure on prices. Consumers find themselves competing for limited goods, and sellers may respond by raising prices, which is encapsulated by the principle in our exercise that when quantity demanded is greater than quantity supplied, the market price will rise.

A surplus, on the other hand, happens when the quantity of a good or service supplied exceeds the demand at the current price. Sellers may then lower prices to stimulate demand or reduce their supply to match the lower demand level. These reactive measures aim to bring the market back to equilibrium. In both situations, prices adjust to clear the imbalance, with shortages leading to higher prices and surpluses causing prices to fall, until the quantity supplied equals the quantity demanded once again.