Chapter 7, Problem 2MCQ

To determine

The reasons for the fall in prices.

Explanation of Solution

If the market price is above the equilibrium price, the consumers have to pay more than their willingness to pay which discourages them to buy more commodities.

The following graph represents the market price and surplus quantity in the market:

  

Here, the market price (P2) is higher than the equilibrium price (P1), and the quantity supplied is more than the quantity demanded. It reflects the surplus of goods in the market.

At this higher price, consumers demand less while suppliers supply more. To absorb the surplus quantity and bring the economy back to the equilibrium level, the market price will fall and reach the equilibrium point.

So, the price will fall if it is above the equilibrium price.

Option “d” is correct.