Which of the following best explains the connection between the law of demand and excess demand in a market?

• A. Excess demand occurs when the price is below equilibrium, causing quantity demanded to exceed quantity supplied, which is consistent with the law of demand.
• B. Excess demand is unrelated to the law of demand and only occurs due to government intervention.
• C. Excess demand arises when the price is above equilibrium, leading to a decrease in quantity demanded and an increase in quantity supplied.
• D. The law of demand states that as price increases, quantity demanded increases, resulting in excess demand.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the law of demand, which states that, all else equal, as the price of a good increases, the quantity demanded decreases, and conversely, as the price decreases, the quantity demanded increases. This relationship is typically represented by a downward-sloping demand curve.
2. Step 2: Define excess demand (also called a shortage) as the situation where the quantity demanded exceeds the quantity supplied at a given price. This usually happens when the price is set below the market equilibrium price.
3. Step 3: Recall that the market equilibrium price is the price at which quantity demanded equals quantity supplied. At this price, there is no excess demand or excess supply.
4. Step 4: Connect the law of demand to excess demand by noting that if the price is below equilibrium, the lower price increases quantity demanded (due to the law of demand) while quantity supplied decreases (since suppliers are less willing to supply at lower prices), resulting in excess demand.
5. Step 5: Conclude that excess demand occurring when price is below equilibrium, causing quantity demanded to exceed quantity supplied, is consistent with the law of demand, making the first answer choice the best explanation.