In a competitive market, what typically happens when quantity demanded exceeds quantity supplied at the current price (i.e., a shortage)?

• A. The market price falls because producers have excess inventory they must sell.
• B. The shortage causes the demand curve to shift left, reducing demand until the market clears.
• C. Quantity supplied decreases as firms cut production in response to unmet demand.
• D. Buyers bid the price up, creating upward pressure on price until the shortage is reduced or eliminated.

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the concept of shortage in a competitive market. A shortage occurs when the quantity demanded (Qd) at the current price exceeds the quantity supplied (Qs), meaning there are more buyers wanting the good than there are goods available.
2. Step 2: Recognize that in a competitive market, prices act as signals to both buyers and sellers. When there is a shortage, buyers compete to obtain the limited goods, which creates upward pressure on the price.
3. Step 3: Analyze the effect of rising prices on quantity demanded and quantity supplied. As the price increases, the law of demand tells us that quantity demanded will decrease, while the law of supply tells us that quantity supplied will increase.
4. Step 4: Understand that this price adjustment continues until the market reaches equilibrium, where quantity demanded equals quantity supplied, and the shortage is eliminated.
5. Step 5: Conclude that the correct market response to a shortage is that buyers bid the price up, causing the price to rise until the shortage disappears, rather than the other options such as price falling or demand shifting.