Today's Question
Equilibrium occurs where supply equals demand - the quantity sellers want to sell exactly matches what buyers want to buy. If there's excess supply (surplus), what naturally happens to push the market back toward equilibrium? What about excess demand (shortage)?
Model Answer
Surplus: Sellers have unsold inventory piling up. They cut prices to move goods, which attracts more buyers and discourages some producers. Price falls toward equilibrium. Shortage: Buyers compete for limited goods - some offer to pay more. Sellers see this and raise prices, which attracts more producers and discourages some buyers. Price rises toward equilibrium. Markets self-correct through price signals!