At a price p2 above the equilibrium price, market supply is q2 and market demand is q′2. Which of the following is NOT correct?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → The excess demand is equal to q2 – q′2.
Above the equilibrium price, firms want to sell more than buyers want to buy. The gap q2 − q′2 is an excess supply.
Option (1) Some firms are not able to sell the quantity they want to sell at p2. — True. Supply q2 is more than demand q′2, so some output stays unsold at p2.
Option (2) The excess demand is equal to q2 – q′2. — False. When supply is more than demand, the gap is an excess supply. Excess demand arises only below the equilibrium price.
Option (3) Some firms that cannot sell their desired output lower their price. — True. Firms with unsold output cut their price.
Option (4) The price falls until market demand equals market supply. — True. As the price falls, demand rises and supply falls until the two are equal at p*.
NCERT (2026-27): “5.1 Equilibrium, Excess Demand, Excess Supply … If at a price, market supply is greater than market demand, we say that there is an excess supply in the market at that price and if market demand exceeds market supply at a price, it is said that excess demand exists in the market at that price. Therefore, equilibrium in a perfectly competitive market can be defined alternatively as zero excess demand-zero excess supply situation.” “5.1.1 Market Equilibrium: Fixed Number of Firms … Some firms will not be then able to sell quantity they want to sell; so, they will lower their price. All other things remaining the same as price falls, quantity demanded rises, quantity supplied falls, and at p*, the firms are able to sell their desired output since market demand equals market supply at that price. Therefore, p* is the equilibrium price and the corresponding quantity q* is the equilibrium quantity.” |