Question

Explain what happens when the market price is less than the equilibrium price.

Answer 1

When the market price is less than the equilibrium price, the quantity demanded becomes greater than the quantity supplied, resulting in excess demand or a shortage in the market. This imbalance creates competition among buyers, as there is not enough supply to meet the high demand. As a result, sellers realize they can increase prices, leading to upward pressure on the price. This rise in price encourages producers to increase supply and discourages buyers from demanding more. Gradually, the market moves toward equilibrium, where demand equals supply and the shortage is eliminated.