Question

When quantity supplied is greater than quantity demanded,_____. 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 variety of factors

Short answer

When quantity supplied is greater than quantity demanded, the correct answer is: a) price will fall to its equilibrium level

Step-by-step solution

Analyze the relationship between supply and demand

Supply and demand are two basic economic concepts that determine the price of a product in the market. When the quantity supplied exceeds the quantity demanded, there is a surplus of the product in the market, which typically leads to a decrease in the price.

Understand the concept of equilibrium price

The equilibrium price is the price at which the quantity supplied exactly equals the quantity demanded in the market. At this price level, there is no surplus or shortage of the product, and the market effectively clears.

Evaluate the given statements based on the relationship between supply, demand, and equilibrium price

a) If the quantity supplied is greater than the quantity demanded, there is a surplus in the market, which puts downward pressure on the price. As the price decreases, the quantity demanded will increase and the quantity supplied will decrease, until they reach the equilibrium level. b) If the price were to rise, it would further increase the surplus in the market as the quantity supplied would increase even more and the quantity demanded would decrease, moving the market further away from equilibrium. c) The price behavior in this situation should not depend on other factors. As long as there is a surplus in the market, the price should decrease to reach equilibrium.

Select the correct answer

Based on our understanding of supply, demand, and equilibrium, we can conclude that when the quantity supplied is greater than the quantity demanded, the correct answer is: a) price will fall to its equilibrium level

Key concepts

Equilibrium Price

The equilibrium price is a magical point where the quantity of a product that suppliers want to sell exactly matches the quantity that consumers want to buy. Think of it as a perfect balance between supply and demand. At this point, the market is stable, and there's no excess supply or shortage of the product.
The equilibrium price is critical because it ensures that resources are allocated efficiently. It prevents wastage and ensures that producers and consumers are both satisfied.
For instance, if a new phone hits the market, the equilibrium price ensures that every consumer who wants the phone at that price can get it, and every supplier can sell their stock without leftover inventory.

• Equilibrium means balance: neither surplus nor shortage.
• It ensures efficient resource allocation.
• Both producers and consumers are content at this price level.

Market Surplus

A market surplus occurs when there are more goods available than there are buyers to purchase them. In simple terms, it's when "supply exceeds demand." Imagine going to a bakery right before closing, and there are still plenty of unsold pastries. That's a surplus.
Surplus leads to decreasing prices because sellers want to get rid of excess stock.
They might lower prices to encourage more sales. This is because, in economic terms, a surplus exerts downward pressure on prices.

• Occurs when quantity supplied is greater than quantity demanded.
• Creates downward pressure on prices.
• Sellers reduce prices to clear excess inventory.

Price Adjustment

Price adjustment is a process where prices change in response to market conditions such as surpluses or shortages. When there's a surplus, prices tend to fall. This is because sellers want their goods to move off the shelves, leading to price cuts.
Conversely, if there's a shortage, prices might rise. Sellers know they can charge more since the demand is high.
This process continues until the market reaches equilibrium, balancing out supply and demand.

• Prices decrease during a surplus.
• Prices increase during a shortage.
• Aim is to return to equilibrium.

Quantity Demanded

Quantity demanded refers to the amount of a product that consumers are willing and able to purchase at a given price. When prices drop, typically more people want to buy the product, increasing the quantity demanded.
The inverse relationship between price and quantity demanded is known as the "law of demand." The cheaper something is, the more likely people will buy it.
This principle plays a critical role when dealing with market surpluses or shortages.

• Reflects consumers' willingness to buy at different prices.
• Increases when prices lower (and vice versa).
• Central to understanding market dynamics.