Question

Assume in a competitive market that price is initially below the equilibrium level. What will happen in the market?

a) Surplus of goods
b) Shortage of goods
c) Equilibrium price remains the same
d) No change in quantity demanded

Answer 1

Below equilibrium - shortage, Above equilibrium - surplus

Step-by-step explanation:

The equilibrium price and equilibrium quantity occur where the supply and demand curves cross. The equilibrium occurs where the quantity demanded is equal to the quantity supplied.

If the price is below the equilibrium level, then the quantity demanded will exceed the quantity supplied. Excess demand or a shortage will exist.

If the price is above the equilibrium level, then the quantity supplied will exceed the quantity demanded. Excess supply or a surplus will exist.

In either case, economic pressures will push the price toward the equilibrium level.