Consider the following statements about market equilibrium:
Statement I: In equilibrium, the quantity that all firms wish to sell equals the quantity all consumers want to buy.
Statement II: Excess supply exists when the market demand is greater than the market supply.
Which of the above statements is/are correct?
Show answer & explanation
Correct answer: A
Explanation
Correct Answer:-
Only Statement I is correct
Explanation:-
Statement I is correct because market equilibrium occurs at a price level where the total quantity that producers are willing to supply exactly matches the total quantity that consumers are willing to purchase. At this specific point, there is no inherent pressure for the price to move up or down, as the market has cleared.
Statement II is incorrect because excess supply, commonly referred to as a surplus, occurs specifically when the quantity supplied by producers exceeds the quantity demanded by consumers. Conversely, when market demand is greater than market supply, this situation is defined as excess demand or a shortage.
Key Points
Market equilibrium represents the fundamental balance between the forces of supply and demand. If the current market price is set above the equilibrium level, a surplus will emerge, which generally exerts downward pressure on prices. If the price is set below the equilibrium level, a shortage will occur, which generally exerts upward pressure on prices until the balance is restored.
Important Questions and Answers
Question: What happens to the price when there is excess demand in the market?
Answer: The price tends to increase until it reaches the equilibrium level where demand and supply are once again balanced.
Question: If the current market price is above the equilibrium price, will there be a shortage or a surplus?
Answer: There will be a surplus, also known as excess supply.