Suppose the price indicated by p_2 on the graph is above the market equilibrium price. Which of the following must happen to p_2 in order to achieve market equilibrium?

• A. The price p_2 must decrease until quantity demanded equals quantity supplied.
• B. The price p_2 must increase to encourage more production.
• C. The price p_2 should remain unchanged to maintain current market conditions.
• D. The price p_2 must fluctuate randomly until equilibrium is reached.

Answer: (A)

Verified step by step guidance

1. Understand that market equilibrium occurs where quantity demanded equals quantity supplied, which determines the equilibrium price.
2. Recognize that if the price \(p_2\) is above the equilibrium price, the quantity supplied will be greater than the quantity demanded, creating a surplus in the market.
3. Know that a surplus puts downward pressure on the price because sellers will want to reduce prices to sell their excess goods.
4. Therefore, the price \(p_2\) must decrease to reduce the surplus by increasing quantity demanded and decreasing quantity supplied until they are equal.
5. Once the price reaches the equilibrium level, the market clears, meaning quantity demanded equals quantity supplied, and there is no incentive for the price to change further.