The undersupply scenario is an example of the market tending toward what state?

• A. Equilibrium
• B. Diversion
• C. Distortion
• D. Participation

Answer: (A)

An undersupply creates a shortage: quantity demanded exceeds quantity supplied at current prices. In a competitive market, that shortage pushes prices up. Higher prices encourage producers to raise output and encourage some buyers to scale back purchases. As prices continue to adjust, the quantity supplied increases and the quantity demanded decreases until they balance. That balance is the equilibrium, where the market clears with equal quantities. So the market tends toward equilibrium. Diversion, distortion, and participation don’t describe this adjustment process or the end state of a market experiencing a shortage.