In a competitive market, which situation is most likely to create excess demand (a shortage), meaning that quantity demanded exceeds quantity supplied?

• A. Both demand and supply increase by the same amount so the market remains in equilibrium at the original price.
• B. The market price is set below the equilibrium price (for example, by a binding price ceiling).
• C. The market price is set above the equilibrium price (for example, by a binding price floor).
• D. The market price equals the equilibrium price, so quantity demanded equals quantity supplied.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the concept of equilibrium price, which is the price at which quantity demanded equals quantity supplied in a competitive market.
2. Step 2: Recognize that if the market price is set below the equilibrium price (such as by a binding price ceiling), the quantity demanded will increase because the good is cheaper, while the quantity supplied will decrease because producers are less willing to supply at the lower price.
3. Step 3: Use the basic supply and demand framework to analyze the effects of a price ceiling: at a price below equilibrium, \(Q_d > Q_s\), leading to excess demand or a shortage.
4. Step 4: Contrast this with a price floor set above equilibrium, which causes excess supply (a surplus), and with prices at equilibrium, where quantity demanded equals quantity supplied.
5. Step 5: Conclude that the situation most likely to create excess demand (shortage) is when the market price is set below the equilibrium price, causing quantity demanded to exceed quantity supplied.