Question

The graph shows excess supply.

Which explains why the price indicated by p2 on the graph is higher than the equilibrium price?



A) As prices rise, demand goes up.
B) As prices rise, demand goes down.
C) As prices rise, demand stays the same.
D) As prices rise, demand disappears.

Answer 1

B) As prices rise, demand goes down.

Answer 2

The correct answer is B.

A demand function represents the quantity of a certain good or service that consumers are willing to purchase at different prices level. The law of demand states that there is an inverse relationship between price and quantity supplied (ceteris paribus).Therefore, when the market price increases, the amount demanded drops.

A supply function represents the quantity of a certain good or service that producers are willing to supply at different prices level. The law of supply states that there is a direct relationship between price and quantity supplied (ceteris paribus).Therefore, when the market price increases, so does the amount that producers desire to supply.

For a price level located above the equilibrium, the quantity demanded has decreased while the quantity supplied has increased. This is why it leds to an excess supply situation.