Question

The graph shows excess demand.

A graph titled Excess supply has quantity on the x-axis and price on the y-axis. A line with positive slope represents supply and a line with negative slope represents demand. The lines intersect at the point of equilibrium (p star, Q star). A point on the demand line is (P 2, quantity demanded) and a point on the supply line is (P 2, quantity supplied). Both points are lower than the point of equilibrium. Excess demand is indicated between the 2 points.

Which needs to happen in order to stop disequilibrium from occurring?

Q needs to be coordinated with supply.
Q needs to be coordinated with demand.
The price of goods needs to be increased.
The price of goods needs to be decreased.

Answer 1

The price of the goods needs to be increased.

Raising price reduces quantity demanded and increases quantity supplied, eliminating the excess demand (shortage) and moving the market back to the equilibrium (p*, Q*).