In a competitive market, what happens when quantity supplied exceeds quantity demanded at the current price (i.e., there is a surplus)?

• A. Sellers lower the price to reduce the surplus, increasing quantity demanded and decreasing quantity supplied until equilibrium is restored.
• B. A shortage occurs, so firms raise the price to ration the good among buyers.
• C. Buyers bid up the price, causing quantity demanded to fall and quantity supplied to rise until equilibrium is restored.
• D. The market price remains unchanged because surpluses automatically eliminate themselves without any price adjustment.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the concept of surplus in a competitive market. A surplus occurs when the quantity supplied (\(Q_s\)) exceeds the quantity demanded (\(Q_d\)) at the current price (\(P\)), i.e., \(Q_s > Q_d\).
2. Step 2: Recognize that when there is a surplus, sellers have excess goods that are not being sold at the current price, creating an incentive to lower the price to attract more buyers.
3. Step 3: Analyze the effect of lowering the price: as price decreases, the quantity demanded (\(Q_d\)) increases because consumers are willing to buy more at lower prices, and the quantity supplied (\(Q_s\)) decreases because producers are less willing to supply at lower prices.
4. Step 4: Understand that this price adjustment continues until the market reaches equilibrium, where quantity demanded equals quantity supplied (\(Q_d = Q_s\)), eliminating the surplus.
5. Step 5: Conclude that the market mechanism naturally moves the price down in response to a surplus, balancing supply and demand without external intervention.