As the market moves toward the equilibrium price when there is a surplus, the quantity demanded ____and the quantity supplied______.
A. increases; increases
B. increases; decreases
C. decreases; decreases
D. decreases; increases
The correct answer and explanation is:
The correct answer is B. increases; decreases.
When there is a surplus in the market, the quantity supplied exceeds the quantity demanded at the current price. This occurs when the price is set too high, resulting in suppliers offering more of a good or service than consumers are willing to buy at that price.
To restore equilibrium, the market will naturally adjust. As suppliers recognize that there is excess inventory, they will lower the price in an attempt to increase sales and reduce their surplus. As the price decreases, the quantity demanded increases because consumers are more willing to buy the product at a lower price.
At the same time, as the price falls, suppliers will be less willing to supply the good or service, leading to a decrease in the quantity supplied. This is because the lower price may not cover the costs of production, or suppliers may find it less profitable to sell at the reduced price.
The market continues this adjustment process until the quantity demanded equals the quantity supplied at the equilibrium price. At this point, there is no surplus or shortage in the market, and the forces of supply and demand are in balance.
In summary, when there is a surplus, the price decreases, the quantity demanded increases, and the quantity supplied decreases until the market reaches equilibrium. This price mechanism is a key characteristic of competitive markets, where prices serve as signals to both buyers and sellers.