Title If price is above equilibrium, A. quantity supplied exceeds quantity demanded… Description If price is above equilibrium, A. quantity supplied exceeds quantity demanded and a surplus exists.?B. the income and substitution effects will cause the price to rise.?C. quantity demanded exceeds quantity supplied and a shortage exits.?D. demand will increase.?E. quantity supplied is too low for equilibrium.
The correct answer and explanation is:
Correct Answer: A. Quantity supplied exceeds quantity demanded and a surplus exists.
When the price of a good or service is set above its equilibrium level, the quantity that producers are willing to supply becomes greater than the quantity that consumers are willing to buy. This imbalance results in a surplus, also known as excess supply. The equilibrium price is the point at which the quantity of goods supplied matches the quantity demanded. It is the natural price where there is no incentive for the price to either rise or fall because the market is cleared.
At a price above equilibrium, consumers find the good too expensive and reduce their purchases. At the same time, producers see an opportunity to sell more due to the higher price and increase production. The result is that more goods are produced than what buyers are willing to purchase. These unsold goods accumulate, creating a surplus in the market.
This surplus puts downward pressure on the price. Sellers, in an effort to clear their inventories, may begin to lower prices to attract more buyers. As the price falls, quantity demanded increases while quantity supplied decreases. Eventually, the price reaches equilibrium, where supply equals demand and the surplus is eliminated.
This mechanism is a fundamental principle in market economies. It ensures that markets tend to move toward balance without external intervention. The interaction of supply and demand acts as a self-regulating system that guides prices to their most efficient level. This is why option A is the correct answer. It accurately describes the natural outcome of setting a price above the market equilibrium: excess supply or surplus.