Question

If \( P_e \) is the equilibrium price and \( P_m \) is the market price, when will the situation of excess supply arise?

• A. \( P_e = P_m \)
• B. \( P_e>P_m \)
• C. \( P_e<P_m \)
• D. None of these

Hint:

Excess supply occurs when the market price is above the equilibrium price, leading to unsold goods and a surplus in the market.

Answer 1

The Correct Option is C

Step 1: Understanding the Concepts of Equilibrium Price and Market Price:
- Equilibrium Price ( \( P_e \) ): This is the price at which the quantity of goods supplied equals the quantity demanded in the market. At this price, the market is in balance.
- Market Price ( \( P_m \) ): This is the current price at which goods are actually being sold in the market. The market price can deviate from the equilibrium price due to changes in supply, demand, or external factors.
Step 2: Analyzing the Situation of Excess Supply:
- Option (A) \( P_e = P_m \): If the equilibrium price equals the market price, the market is in balance, and there is no excess supply or demand. This is the situation of market equilibrium.
- Option (B) \( P_e>P_m \): If the equilibrium price is greater than the market price, there is excess demand, as consumers are willing to buy more at the higher price, but sellers are not supplying enough. This does not indicate excess supply.
- Option (C) \( P_e<P_m \): If the market price is higher than the equilibrium price, the quantity supplied exceeds the quantity demanded, resulting in excess supply. In this case, there are more goods available than people want to buy at the current price.
- Option (D) None of these: This is incorrect, as option (C) correctly describes the situation of excess supply.
Step 3: Conclusion and Answer:
The correct answer is (C), because excess supply occurs when the market price exceeds the equilibrium price, leading to an imbalance where suppliers are willing to sell more than consumers are willing to buy.