Registered Environmental Manager (REM) Practice Exam

What occurs when the initial price in a market is set higher than the equilibrium price?

1. A scarcity

2. A competitive market

3. A surplus

4. An increase in demand

The correct answer is: A surplus

When the initial price in a market is set higher than the equilibrium price, a surplus occurs. This is because the higher price leads to a greater quantity of the good or service supplied than is demanded by consumers at that price point. In essence, sellers are willing to supply more than consumers are willing to buy, resulting in unsold goods accumulating in the market. At equilibrium, the quantity supplied equals the quantity demanded, ensuring that the market clears. However, when the price is artificially raised above this equilibrium level, it creates excess supply, which can cause producers to lower their prices in order to stimulate demand and bring the market back towards equilibrium. This dynamic illustrates the fundamental principles of supply and demand within economic theory. A scarcity would occur if the price were set too low, leading to high demand but insufficient supply. A competitive market refers to the overall market conditions that can exist regardless of pricing levels, while an increase in demand would shift the demand curve to the right, generally resulting from factors other than price. Thus, setting a price above equilibrium leads directly to a surplus, conveniently illustrating supply-demand interactions.