Figure 4-17. At a price
The Correct Answer and Explanation is:
The correct answer is: $7, there is a surplus of 5 units.
In the given graph, the supply and demand curves illustrate the classic interaction of market forces. The supply curve slopes upward, indicating that higher prices lead to higher quantities supplied, since producers are willing to offer more of a good when they receive a better price. The demand curve slopes downward, showing that consumers buy more at lower prices and reduce their quantity demanded when prices rise.
Equilibrium occurs where the two curves intersect. In this case, that point is at a price of $6 and a quantity of 5 units. At this equilibrium, the quantity consumers want to buy equals the quantity producers are willing to sell, so there is no surplus or shortage.
However, if the market price is set above the equilibrium, a surplus emerges. For example, at a price of $7, suppliers are motivated to provide more goods—in this case, 7 units. Yet, at this higher price, fewer consumers are willing to buy. The quantity demanded drops to 2 units. This mismatch creates an excess of goods: 7 units are supplied, but only 2 are purchased, leaving a surplus of 5 units.
Such surpluses signal inefficiencies in the market. Excess goods remain unsold, leading suppliers to eventually lower prices to entice more buyers and move back toward equilibrium. This corrective action illustrates how prices function as signals that coordinate economic activity. They guide consumers and producers toward balance by adjusting supply and demand.
Understanding how surpluses and shortages occur is essential for interpreting real-world market dynamics. It allows economists and decision-makers to anticipate how price changes affect behavior and output levels in competitive markets. The graph in Figure 4-17 visually captures these dynamics, making it easier to grasp how the price mechanism maintains equilibrium.
