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When Equilibrium Price of a Good is Less than Its Market Price, There Will Be Competition Among the Sellers. - Economics

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Giving reason, state whether the following statement is true or false.
When equilibrium price of a good is less than its market price, there will be competition among the sellers.

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Solution

True, when equilibrium price of a good is less than its market price, there will be competition among the sellers. In the diagram, the equilibrium price and quantity are OP and OQ. As the equilibrium price is low for farmers, the government fixes the price floor, i.e. the price level increased from OP to OP1 which leads to a decline in the quantity demand, and therefore, there is excess supply in the market. Here, the competition will increase among the sellers, and hence, the price will come down to the equilibrium point where market demand is equal to market supply.

Concept: Equilibrium Price
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