Question

In a market without price controls, market pressures push prices toward ____  1.shortage prices

2.equilibrium prices
3.surplus prices_.

Answer 1

push prices toward shortage prices

Answer 2

The correct answer is 2.

When markets are allowed to freely fluctuate, prices tend to the equilibrium, the quantities supplied and demanded are equal and the market is cleared.

If the supply of a certain good drops due to a natural disaster, for example, there is an excess of demand and therefore there is a subsequent price increase, so that many consumers refuse to demand such product at a more expensive price, and the price rise continues until demand and supply are equaled again forming a new equilbrium.

When price controls are established, natural market movements are distorted. There are two situations:

• A price floor is the minimum price allowed for a good, which is established by an economic authority and which distorts the market when it is located above the equilibrium price, creating a situation of excess supply. The most famous price floor is the minimum wage in the labor market.
• A price ceiling is the maximum price allowed for a good, which distorts the market when it is smaller than the equilibrum because it creates a situation of excess demand.