In a competitive market, when supply exceeds demand at the current price (creating a surplus), what is the most likely effect on the market price over time?

• A. The price tends to rise as sellers restrict output to create scarcity.
• B. The price tends to fall as sellers lower prices to reduce unsold inventory.
• C. The price remains unchanged because surpluses automatically eliminate themselves without price changes.
• D. The price becomes indeterminate because demand shifts upward until it matches supply.

Answer: (B)

Verified step by step guidance

1. Understand the concept of surplus in a competitive market: A surplus occurs when the quantity supplied exceeds the quantity demanded at the current price.
2. Recognize that in a competitive market, prices act as signals to balance supply and demand. When there is a surplus, sellers have unsold inventory.
3. Analyze seller behavior: To reduce unsold inventory, sellers are likely to lower prices to encourage more buyers to purchase the product.
4. Understand the effect of price changes on quantity demanded and supplied: Lower prices typically increase quantity demanded and decrease quantity supplied, moving the market toward equilibrium.
5. Conclude that over time, the market price tends to fall in response to a surplus until supply and demand are balanced.