-Refer to Figure 3 -4. The figure above represents the market for canvas tote bags. Assume that the market price is US$35. Which of the following statement is true?
A) There is a surplus that will cause the price to decrease; quantity supplied will then increase and quantity demanded will decrease until the price equals US$25.
B) There is a surplus that will cause the price to decrease; quantity demanded will then increase and quantity supplied will decrease until the price equals US$25.
C) There is a surplus that will cause the price to increase; quantity demanded will then decrease and quantity supplied will increase until the price equals US$25.
D) There will be a surplus that will cause the price to decrease; demand will then increase and supply will decrease until the price equals US$25.

Question

-Refer to Figure 3 -4. The figure above represents the market for canvas tote bags. Assume that the market price is US$35. Which of the following statement is true?
A) There is a surplus that will cause the price to decrease; quantity supplied will then increase and quantity demanded will decrease until the price equals US$25. 
B) There is a surplus that will cause the price to decrease; quantity demanded will then increase and quantity supplied will decrease until the price equals US$25. 
C) There is a surplus that will cause the price to increase; quantity demanded will then decrease and quantity supplied will increase until the price equals US$25. 
D) There will be a surplus that will cause the price to decrease; demand will then increase and supply will decrease until the price equals US$25.

Quizplus · Accepted Answer

In a market, when the price is above the equilibrium, a surplus occurs because the quantity supplied exceeds the quantity demanded. This surplus puts downward pressure on the price. As the price decreases, the quantity demanded will increase (because consumers are more willing to buy cheaper goods) and the quantity supplied will decrease (because producers are less willing to supply goods at lower prices), moving the market towards equilibrium.