In a competitive market, how do supply and demand determine the market price and quantity?

• A. The market price and quantity are set where the quantity demanded equals the quantity supplied (the intersection of the demand and supply curves).
• B. The market price is set where quantity demanded is greater than quantity supplied, ensuring a shortage persists.
• C. The market price is determined solely by consumers’ willingness to pay, regardless of supply conditions.
• D. The market price is determined solely by producers’ costs, regardless of demand conditions.

Answer: (A)

Verified step by step guidance

1. Understand that in a competitive market, the price and quantity are determined by the interaction of supply and demand curves.
2. Identify the demand curve, which shows the relationship between price and quantity demanded by consumers; typically, as price decreases, quantity demanded increases.
3. Identify the supply curve, which shows the relationship between price and quantity supplied by producers; typically, as price increases, quantity supplied increases.
4. Find the equilibrium point where the quantity demanded equals the quantity supplied. Mathematically, this means solving for price \( P^* \) such that \( Q_d(P^*) = Q_s(P^*) \), where \( Q_d \) is quantity demanded and \( Q_s \) is quantity supplied.
5. Recognize that this equilibrium price \( P^* \) and quantity \( Q^* \) are the market-clearing values where there is no shortage or surplus, and the market is in balance.