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Question
State whether the following statement is true or false. Give reasons for your answer :
When the equilibrium price is greater than the market price there will be excess supply in the market.
Options
True
False
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Solution
True, when equilibrium price is greater than market price there will be excess supply in the market.
Explanation:
For example, let us suppose that the price of a good is Rs 12 (which is higher than the equilibrium price of Rs 8), and at this price, only 2 units of output are demanded, while as per the market supply curve SS, the producers are ready to sell 6 units of output. As the market supply is more than the market demand, so there is a situation of excess supply by 4 units (i.e. 6 –2 = 4 units). This excess supply will increase competition among the sellers; consequently, they will reduce the price in order to sell more of their output. The fall in price will continue until the price becomes Rs 8, where market demand equals market supply.
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