Question

When quantity demanded is greater than quantity supplied, _____. a) market price will rise b) market price will fall c) market price will stay the same

Short answer

a) market price will rise

Step-by-step solution

Understanding the Law of Supply and Demand

The law of supply and demand is an economic principle that explains the way market prices are determined. According to this law, in a competitive market, the unit price of a product will vary until it settles at a point where the quantity demanded by consumers will equal the quantity supplied by producers; this point is called the equilibrium.

Identify the situation when quantity demanded is greater than quantity supplied

In our given situation, the quantity demanded is greater than the quantity supplied. This indicates that there is more demand for the product than the current supply. This is a situation of excess demand or a shortage in the market.

Determine the impact on market price

When there is excess demand or a shortage, consumers are willing to pay a higher price to obtain the desired product. Producers respond to this by increasing the price of the product. This continues until a new equilibrium is reached at a higher price level and the quantity demanded equals the quantity supplied. Based on this analysis, we can conclude that the correct answer is: a) market price will rise

Key concepts

Understanding Market Equilibrium

Market equilibrium is a critical concept in economics that describes the point at which the quantity of a product demanded by consumers exactly matches the quantity supplied by producers. At this point, the market is said to be "balanced," with no pressure for the price to change.
In a graphical representation, market equilibrium is found at the intersection of the supply and demand curves. This intersection signifies a stable condition where all market forces are in harmony.

• If the price is below the equilibrium, demand will exceed supply, leading to a shortage.
• If the price is above the equilibrium, supply will exceed demand, resulting in a surplus.

The fascinating aspect of market equilibrium is its dynamic nature. Any change in either demand or supply can disrupt it, prompting adjustments in price or quantity to restore balance.

Excess Demand Explained

Excess demand occurs when the quantity demanded in a market exceeds the quantity supplied at the current price. This can happen during various market conditions, such as increased consumer interest or limited inventory.
When excess demand exists, it creates a scenario known as a 'shortage.' Consumers are eager to purchase more than what is available, often leading to intense competition among buyers.

• In a shortage, buyers may agree to pay higher prices to secure the product they desire.
• Producers, seeing the opportunity for increased profits, may raise their prices to match consumer willingness.

This upward pressure on prices continues until supply can meet the increased demand, leading to a new equilibrium. Thus, excess demand plays a vital role in forcing market adjustments and ensuring efficient allocation of resources.

How Market Price is Determined

The market price is the amount of money required to purchase a good or service in a free market and is determined by the interactions of supply and demand.
At equilibrium, the market price reflects a balance where the quantity demanded equals the quantity supplied. However, shifts in demand or supply can alter this balance, causing the price to adjust.

• A higher demand than supply leads to rising prices, as competition for the scarce resources heats up.
• Conversely, if supply exceeds demand, prices begin to fall as sellers compete to attract buyers.
• Market price serves as a signal to both consumers and producers, indicating the value of resources and guiding economic decisions.

Understanding how market prices are determined is essential for grasping economic behaviors and the natural adjustments markets make to maintain equilibrium.