Multiple Choice
In the context of market equilibrium, what is the point called where the supply and demand curves intersect?
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3. The Market Forces of Supply and Demand
Market Equilibrium
Multiple Choice
In the graph showing market equilibrium, what happens if the market price is set above the equilibrium price while the equilibrium quantity is qe?
A
A shortage will occur because quantity demanded exceeds quantity supplied.
B
Both quantity supplied and quantity demanded will increase to restore equilibrium.
C
The market will remain in equilibrium at quantity qe.
D
A surplus will occur because quantity supplied exceeds quantity demanded.
Verified step by step guidance1
Step 1: Understand the concept of market equilibrium, which occurs at the price where quantity demanded equals quantity supplied, denoted as \(q_e\) for equilibrium quantity and \(P_e\) for equilibrium price.
Step 2: Analyze what happens when the market price is set above the equilibrium price, i.e., \(P > P_e\). At this higher price, suppliers are willing to supply more, so quantity supplied increases.
Step 3: At the same time, consumers will demand less because the price is higher, so quantity demanded decreases.
Step 4: Compare quantity supplied and quantity demanded at this higher price. Since quantity supplied is greater than quantity demanded, a surplus occurs in the market.
Step 5: Recognize that this surplus puts downward pressure on the price, pushing it back toward the equilibrium price \(P_e\), where the market clears and quantity demanded equals quantity supplied.
