In the graph showing market equilibrium, what happens if the market price is set above the equilibrium price while the equilibrium quantity is qe?

• A. A shortage will occur because quantity demanded exceeds quantity supplied.
• B. Both quantity supplied and quantity demanded will increase to restore equilibrium.
• C. The market will remain in equilibrium at quantity qe.
• D. A surplus will occur because quantity supplied exceeds quantity demanded.

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the concept of market equilibrium, which occurs at the price where quantity demanded equals quantity supplied, denoted as \(q_e\) for equilibrium quantity and \(P_e\) for equilibrium price.
2. Step 2: Analyze what happens when the market price is set above the equilibrium price, i.e., \(P > P_e\). At this higher price, suppliers are willing to supply more, so quantity supplied increases.
3. Step 3: At the same time, consumers will demand less because the price is higher, so quantity demanded decreases.
4. Step 4: Compare quantity supplied and quantity demanded at this higher price. Since quantity supplied is greater than quantity demanded, a surplus occurs in the market.
5. Step 5: Recognize that this surplus puts downward pressure on the price, pushing it back toward the equilibrium price \(P_e\), where the market clears and quantity demanded equals quantity supplied.