Question

In competitive markets, surpluses or shortages will rev: 05_07_2018 Multiple Choice

A. never exist because the markets are always at equilibrium.
B. cause changes in the quantities demanded and supplied that tend to intensify the excess production or excess demand.
C. cause changes in the quantities demanded and supplied that tend to eliminate the excess production or excess demand.
D. cause shifts in the demand and supply curves that tend to eliminate the excess production or excess demand.

Answer 1

Answer:

C. cause changes in the quantities demanded and supplied that tend to eliminate the excess production or excess demand.

Explanation:

In a competitive economy, the balance between supply and goods and services occurs when demand and supply match. However, situations of oversupply or scarcity tend to alter the parameters of the demand and supply curves. If shortages occur, the price tends to rise, which generates an incentive for production. If oversupply occurs, the price tends to decrease, which is an incentive to increase demand. Thus, suplus or shortages will alter the quantity demanded / offered to cause a rearrangement of these parameters until the economy finds a new equilibrium point.