Suppose the graph shows the market for pizza cutters in a perfectly competitive market. If the market price is above the equilibrium price, what is most likely to occur?

• A. The market will remain in equilibrium with no pressure on price.
• B. A surplus of pizza cutters will develop, causing the price to fall.
• C. Firms will exit the market, reducing the supply of pizza cutters.
• D. A shortage of pizza cutters will develop, causing the price to rise.

Answer: (B)

Verified step by step guidance

1. Understand the concept of market equilibrium: It is the point where the quantity demanded equals the quantity supplied, and there is no tendency for the price to change.
2. Recognize that if the market price is above the equilibrium price, the quantity supplied will exceed the quantity demanded because suppliers want to sell more at higher prices, but consumers want to buy less.
3. Identify that this excess quantity supplied is called a surplus, meaning there are more pizza cutters available than consumers want to buy at that price.
4. Understand that the surplus puts downward pressure on the price because sellers will want to reduce prices to clear the excess inventory.
5. Conclude that as the price falls, the quantity demanded will increase and the quantity supplied will decrease until the market returns to equilibrium.