In a competitive market, when the quantity supplied at the current price is greater than the quantity demanded (a surplus), what will happen to the market price over time (holding other factors constant)?

• A. Fall as sellers reduce prices to eliminate the surplus
• B. Remain unchanged because surpluses do not affect price
• C. Rise until the surplus becomes even larger
• D. Rise as buyers compete for scarce goods

Answer: (A)

Verified step by step guidance

1. Understand the concept of surplus: A surplus occurs when the quantity supplied exceeds the quantity demanded at the current price, meaning there are more goods available than buyers want to purchase.
2. Recall the law of supply and demand: When there is a surplus, sellers have excess inventory and are motivated to lower prices to attract more buyers.
3. Analyze the effect of price changes on quantity demanded and supplied: As the price falls, the quantity demanded will increase (buyers want more), and the quantity supplied will decrease (sellers produce less), moving the market toward equilibrium.
4. Recognize that the market price will adjust downward over time to eliminate the surplus, as sellers compete to sell their excess goods by reducing prices.
5. Conclude that the correct outcome is that the market price will fall as sellers reduce prices to eliminate the surplus, holding other factors constant.