Honor Economics Practice Exam

The main idea is equilibrium in a competitive market: the price at which quantity supplied equals quantity demanded. This is the market-clearing price, because at this level the amount producers want to sell exactly matches what consumers want to buy, so there’s no inherent pressure for the price to move up or down. If the price rises above this point, a surplus occurs—more is supplied than demanded. If the price falls below it, a shortage occurs—more is demanded than supplied. This balancing price arises from the interaction of supply and demand curves and can shift when either curve changes, leading to a new equilibrium. Price ceilings and price floors are legal constraints that can create shortages or surpluses, while market price is simply the price currently prevailing, which may or may not be at the equilibrium.