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

• A. A surplus occurs immediately, causing sellers to cut prices.
• B. The market price falls, increasing the shortage because quantity demanded rises further.
• C. There is no pressure on price; quantity demanded and quantity supplied automatically become equal at the same price.
• D. Buyers bid up the price, putting upward pressure on price until the shortage is reduced or eliminated.

Answer: (D)

Verified step by step guidance

1. Understand the concept of shortage: A shortage occurs when the quantity demanded (Qd) at the current price is greater than the quantity supplied (Qs), i.e., \(Q_d > Q_s\).
2. Recognize that in a competitive market, prices act as signals to balance supply and demand. When there is a shortage, buyers compete to obtain the limited goods available.
3. Explain that this competition among buyers leads to an increase in the market price, as buyers are willing to pay more to secure the product.
4. As the price rises, the quantity demanded typically decreases (due to the law of demand), and the quantity supplied increases (due to the law of supply), moving the market toward equilibrium.
5. Conclude that this upward pressure on price continues until the shortage is eliminated, meaning quantity demanded equals quantity supplied, restoring market equilibrium.