Chapter 5: Problem 16
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
Expert verified
d) down by unhappy sellers
Step by step solution
01
Understand Market Equilibrium
Market equilibrium occurs when the quantity of goods or services demanded by consumers is equal to the quantity supplied by producers. In this situation, market price remains stable, and both buyers and sellers are satisfied with the price.
02
Understand the scenario when market price is above equilibrium price
When the market price is above the equilibrium price, the quantity of goods or services supplied by producers will be higher than the quantity demanded by consumers. In this case, there will be a surplus or excess supply in the market.
03
Identify the behavior of unhappy buyers and sellers due to surplus
In the presence of a surplus, sellers will be unhappy as their goods are not being sold entirely at the higher price, while buyers will also be unhappy as they are being asked to pay more than the equilibrium price. Since producers have excess inventory, they will be willing to lower the price to clear their stock, making the consumer more willing to purchase at a lower price. In response, the market price will gradually decrease.
04
Choose the correct answer
Based on the analysis above, the market price will be driven down by unhappy sellers in order to clear their inventory and to reach an equilibrium. Therefore, the correct answer is:
d) down by unhappy sellers
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Key Concepts
These are the key concepts you need to understand to accurately answer the question.
Excess Supply
Excess supply occurs when the quantity of a good or service supplied in a market exceeds the quantity demanded at the current price. This situation typically happens when the market price is set above the equilibrium price.
In this case, suppliers have produced more goods than buyers are willing to purchase. This leads to a surplus of products in the market. A surplus is problematic because it indicates that resources are not being efficiently used, and sellers are not making as many sales as they could be.
In this case, suppliers have produced more goods than buyers are willing to purchase. This leads to a surplus of products in the market. A surplus is problematic because it indicates that resources are not being efficiently used, and sellers are not making as many sales as they could be.
- Producers find themselves with unsold inventory, which can lead to storage issues or financial loss.
- The surplus exerts a downward pressure on prices as sellers attempt to attract more buyers by reducing prices.
Buyer Behavior
When there is excess supply and prices are higher than the equilibrium price, buyer behavior is significantly affected. Higher prices mean that the cost of goods is more than what buyers ideally want to pay. This feeling of dissatisfaction can lead to decreased demand.
Consumers may respond in several ways:
Consumers may respond in several ways:
- Delaying purchases until prices drop, anticipating future price decreases due to the surplus.
- Substituting costly goods with cheaper alternatives available in the market.
- Reducing the quantity of goods they buy, opting for only essential purchases.
Seller Behavior
Seller behavior, in the context of excess supply, is driven by the need to clear excess inventory and reach a more stable market equilibrium. When sellers realize that their products are not selling as expected because prices are too high, they typically become motivated to make strategic changes.
Key adjustments include:
Key adjustments include:
- Lowering the price of goods to increase demand and attract more buyers.
- Offering promotions or discounts to make purchases more appealing.
- Reducing future production to prevent additional surplus, reflecting adaptive strategies to better match supply with actual demand.
Equilibrium Price Adjustment
Equilibrium price adjustment refers to the changes made to bring the market back into balance when there is excess supply or demand. This process restores equilibrium where supply equals demand, leading to a stable market price.
When prices are initially above equilibrium due to excess supply, you typically witness a downward price adjustment. This adjustment process involves sellers dropping prices to attract more buyers and clear surplus inventory.
When prices are initially above equilibrium due to excess supply, you typically witness a downward price adjustment. This adjustment process involves sellers dropping prices to attract more buyers and clear surplus inventory.
- Price reductions incentivize purchases, reducing the surplus and increasing demand.
- Simultaneously, as the market adjusts, less competitive sellers may exit, or output decreases, further aligning supply with actual demand.