Question

What changes may take place in the market when the prevailing price is greater than the equilibrium price?

Answer 1

• When the prevailing price in the market is greater than the equilibrium price, it results in a situation called excess supply or surplus.
• In this case, the quantity supplied by producers is more than the quantity demanded by consumers.
• Since there are not enough buyers at the higher price, sellers find it difficult to sell all their goods.
• To attract buyers and clear their excess stock, they begin to lower the price.
• As the price falls, the quantity demanded increases while the quantity supplied decreases, gradually eliminating the surplus.
• This adjustment process continues until the market reaches the equilibrium price, where demand equals supply.

Therefore, when the price is above equilibrium, it leads to a fall in price and output until the market stabilises.