Future Business Leader Achievments (FBLA) Economics Practice Exam

What causes competitive markets to move toward an equilibrium price?

1. Supply changing to meet demand

2. Consumers switching to complements and substitutes in reaction to price changes

3. Government price controls

4. Buyers and sellers reacting to shortages and surpluses

The correct answer is: Buyers and sellers reacting to shortages and surpluses

The correct option highlights how buyers and sellers respond to market conditions, namely shortages and surpluses, which are key drivers in moving competitive markets toward an equilibrium price. When there is a surplus, the quantity supplied exceeds the quantity demanded. This excess supply typically leads sellers to lower their prices in an effort to sell off their excess inventory. As prices decrease, the quantity demanded by consumers increases, moving the market closer to equilibrium. Conversely, if a shortage occurs, where the quantity demanded exceeds the quantity supplied, prices tend to rise. Sellers can take advantage of the higher demand, and as prices increase, the quantity supplied will also tend to rise. Consumers may cut back their purchases as prices increase, which helps decrease demand. Both adjustments push the market back toward equilibrium. This dynamic nature of consumer and producer behavior is what drives the market toward a state where the supply of a good matches the demand for it, leading to the equilibrium price where quantity supplied equals quantity demanded. Other choices do not directly address this fundamental interaction in competitive markets.