Question

If excess demand exists in the market, what should happen to restore equilibrium?

• A. Prices should increase
• B. Prices should decrease
• C. Government should set a price cap
• D. Firms should stop production

Hint:

Excess demand: \[ Q_d > Q_s \] Leads to: \[ \mathrm{Rise\ in\ Price} \]

Answer 1

The Correct Option is A

Step 1: Understand excess demand.
Excess demand occurs when: \[ Q_d > Q_s \] that is: \[ \mathrm{Quantity\ Demanded > Quantity\ Supplied} \] This creates shortage in the market.

Step 2: Effect on price.
Due to shortage: \[ \mathrm{Buyers\ compete\ for\ limited\ goods} \] As a result: \[ \mathrm{Price\ rises} \]

Step 3: How equilibrium is restored.
Increase in price:
• Reduces demand
• Increases supply Eventually: \[ Q_d = Q_s \] and equilibrium is restored.

Step 4: Analyze remaining options.
Option (B) Price decrease would increase excess demand further. \[ \Rightarrow \mathrm{Incorrect} \] Option (C) Price cap may worsen shortage. \[ \Rightarrow \mathrm{Incorrect} \] Option (D) Stopping production reduces supply further. \[ \Rightarrow \mathrm{Incorrect} \]

Step 5: Identify the correct option.
Therefore: \[ \boxed{\mathrm{Prices\ should\ increase}} \] Hence, the correct answer is: \[ \boxed{\mathrm{(A)}} \]