In a competitive market, which situation most directly leads to excess demand (a shortage) at the posted price?

• A. Both supply and demand increase by the same amount, leaving a shortage at the original equilibrium price.
• B. The price is set above the equilibrium price, so quantity supplied exceeds quantity demanded.
• C. The price is set below the equilibrium price, so quantity demanded exceeds quantity supplied.
• D. The demand curve shifts left while supply remains unchanged, creating a surplus at the original price.

Answer: (C)

Verified step by step guidance

1. Understand the concept of excess demand (shortage): it occurs when the quantity demanded at a given price exceeds the quantity supplied, leading to a shortage of the good in the market.
2. Recall that the equilibrium price is where quantity demanded equals quantity supplied, so any price set below this equilibrium will increase quantity demanded and decrease quantity supplied.
3. Analyze the effect of setting a price below the equilibrium price: since the price is lower, consumers want to buy more (increase in quantity demanded), but producers are less willing to supply (decrease in quantity supplied).
4. Recognize that this imbalance, where quantity demanded exceeds quantity supplied, directly causes excess demand or a shortage at the posted price.
5. Contrast this with other scenarios: a price above equilibrium causes surplus, equal shifts in supply and demand may not create shortage, and a leftward demand shift reduces demand, potentially causing surplus, not shortage.