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.

Which explains why the price indicated by p2 on the graph is lower than the equilibrium price?

As prices fall, quantity demanded goes up.
As prices fall, quantity demanded goes down.
As prices fall, quantity demanded stays the same.

Answer 1

As prices fall, quantity demanded goes up.

At price p2 (below p*), the demand curve shows a larger quantity demanded and the supply curve a smaller quantity supplied — creating excess demand. The downward slope of the demand curve implies lower price raises quantity demanded.