Registered Environmental Manager (REM) Practice Exam

If the initial price is set lower than the equilibrium price, what is likely to happen?

1. A surplus

2. A shortage

3. A stable market

4. An increase in supplier costs

The correct answer is: A shortage

When the initial price is set lower than the equilibrium price, it creates a situation known as a shortage. This occurs because the lower price encourages more consumers to purchase the product due to its affordability, thus increasing demand. At the same time, suppliers are less willing or able to provide the product at this lower price, which can lead to a decrease in the quantity supplied. The equilibrium price is defined as the point at which the quantity of a product demanded by consumers matches the quantity of the product supplied by producers. Setting the price below this point disrupts this balance, resulting in demand exceeding supply. As consumers compete for the limited goods available, they may find they cannot purchase as much as they desire, thereby leading to a shortage in the market.