If there is excess demand in the market, the price would tend to change. How would the demand change to bring the market back to the equilibrium?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → contraction in demand
At the equilibrium price the quantity buyers want equals the quantity sellers offer. If the price is below this level, buyers want more than sellers offer: there is excess demand. Some buyers are then willing to pay more, so the price rises.
The quantity demanded can change in two different ways:
A change in the good’s own price moves buyers along the same demand curve: a fall in price brings an expansion in demand, a rise in price a contraction.
A change in any other factor, such as income or the price of a related good, shifts the whole demand curve: an increase or a decrease in demand.
Here only the price changes. As it rises, buyers buy less, a contraction in demand, while sellers offer more along the supply curve, and the gap closes at the equilibrium price.
Why the other options are incorrect
Option (1) expansion in demand — Incorrect. An expansion in demand follows a fall in price, which is how a market with excess supply returns to equilibrium.
Option (3) shifts the demand curve to the right — Incorrect. A rightward shift comes from a change in other factors, such as income, not from the good’s own price, and it would only widen the excess demand.
Option (4) decrease in supply — Incorrect. Supply does not decrease here: as the price rises, the quantity supplied rises along the supply curve.
NCERT (2025-26): “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. Whenever market supply is not equal to market demand, and hence the market is not in equilibrium, there will be a tendency for the price to change.… …Some consumers who are either unable to obtain the commodity at all or obtain it in insufficient quantity will be willing to pay more than p1. The market price would tend to increase. All other things remaining the same as price rises, quantity demanded falls and quantity supplied increases. The market moves towards the point where the quantity that the firms want to sell is equal to the quantity that the consumers want to buy.…” |