The graph shows excess supply. Which needs to happen to the price indicated by p2 on the graph in order to achieve equilibrium?
It needs to be increased. It needs to be decreased. It needs to reach the price ceiling. It needs to remain unchanged.
2 answers:
The correct answer is: "It needs to be decreased".
The excess supply situation is represented in the graph attached.
An excess supply situation takes place when, for a certain price level, the amount supplied by producers (Q2) exceeds the quantity demanded by consumers (Q1). Therefore, there is part of the production that remains unsold, and producers incur in losses.
As the graph shows, when there is excess supply, the price level is higher than the one of the equilibrium situation. Alternatively, the equilibrium situation is that in which the desires of producers and consumers (and hence, the quantities supplied and demanded) are equal. This scenario is represented in the graph by the intersection of the supply and demand curves (Q3).
In conclusion, in order to reach the equilibrium point if the starting point is the excess supply situation, the market price needs to be decreased.
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