Cameroon GCE A-Level Economics Practice Questions - Cameroon General Certificate Of Education Advanced Level - Economics (0725) Exam

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If the prevailing market price of palm oil in Douala is set strictly below the market-clearing equilibrium price, what condition arises in the market and how does the price mechanism restore equilibrium in a free market?

An excess supply (surplus) emerges, exerting downward pressure on price until equilibrium is restored. An excess demand (shortage) emerges, causing buyers to bid up the price until quantity demanded equals quantity supplied. Market supply shifts rightward automatically until the shortage is eliminated at the prevailing price. The market remains permanently in disequilibrium because price signals cannot adjust without direct government rationing.

Correct Answer:

An excess demand (shortage) emerges, causing buyers to bid up the price until quantity demanded equals quantity supplied.

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