Which of the following occurs if there is excess demand in a free and unregulated market?

• A. The market price will tend to rise until equilibrium is reached.
• B. Quantity supplied will decrease further.
• C. Quantity demanded will increase further.
• D. The market price will tend to fall until equilibrium is reached.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the concept of excess demand, which occurs when the quantity demanded by consumers exceeds the quantity supplied by producers at the current market price.
2. Step 2: Recall the law of supply and demand, which states that when there is excess demand, there is upward pressure on the price because consumers are willing to pay more to obtain the good.
3. Step 3: Recognize that as the market price rises, the quantity demanded will decrease (due to the law of demand) and the quantity supplied will increase (due to the law of supply), moving the market toward equilibrium.
4. Step 4: Conclude that the market price will tend to rise until the excess demand is eliminated and the market reaches equilibrium where quantity supplied equals quantity demanded.
5. Step 5: Note that the other options (quantity supplied decreasing, quantity demanded increasing, or price falling) contradict the basic principles of supply and demand in the presence of excess demand.