In a competitive market, what is the relationship between supply and demand in determining the equilibrium price and quantity?

• A. Equilibrium occurs where quantity supplied is greater than quantity demanded, creating a shortage that pushes price up.
• B. Equilibrium occurs where quantity supplied equals quantity demanded, and the corresponding price clears the market.
• C. Supply and demand are unrelated to equilibrium; equilibrium is determined solely by producers’ costs.
• D. Equilibrium occurs where quantity demanded is greater than quantity supplied, creating a surplus that pushes price down.

Answer: (B)

Verified step by step guidance

1. Understand the concept of market equilibrium: it is the point where the quantity of a good that consumers want to buy (quantity demanded) equals the quantity that producers want to sell (quantity supplied).
2. Recognize that when quantity supplied equals quantity demanded, the market 'clears,' meaning there is no excess supply or demand, and the price at this point is called the equilibrium price.
3. If quantity supplied is greater than quantity demanded, this creates a surplus, which typically causes the price to fall as sellers compete to sell their excess goods.
4. If quantity demanded is greater than quantity supplied, this creates a shortage, which typically causes the price to rise as buyers compete to obtain the limited goods available.
5. Therefore, the equilibrium price and quantity are determined by the intersection of the supply and demand curves, where \(Q_s = Q_d\), ensuring the market clears without surplus or shortage.