In a local market, the number of homes for sale exceeds the number buyers want at current prices. What tends to happen?
Correct Answer
C) Excess supply causes prices to fall
When market supply is greater than market demand, there is excess supply, and price tends to decrease. Excess demand has the opposite effect.
Why This Is the Correct Answer
Option C is correct because when market supply is greater than market demand there is excess supply, causing price to decrease. Here the number of homes for sale exceeds what buyers want at current prices. Price tends to fall until the market moves back toward balance.
Why the Other Options Are Wrong
Option A: Excess demand causes prices to rise
Option A is wrong because the situation described is excess supply, not excess demand. Excess demand, which would push prices up, is the opposite condition.
Option B: Prices stay fixed until new homes are built
Option B is wrong because prices do not stay fixed until new homes are built; adding new homes would add more supply, and excess supply tends to lower prices.
Option D: Demand rises at current prices to absorb the added supply
Option D is wrong because demand does not simply rise at current prices to absorb extra supply. Prices tend to fall to bring the quantity buyers want closer to the quantity offered.
Too many homes, lower prices
More sellers than buyers means sellers compete, and prices tend to fall.
How to use: Use this when a question describes more homes for sale than buyers want.
Exam Tip
Name the imbalance first, excess supply or excess demand, then pick the price direction.
Common Mistakes to Avoid
- -Mixing up excess supply and excess demand
- -Assuming prices stay fixed when supply exceeds demand
- -Expecting demand to expand to absorb extra supply without a price change
Concept Deep Dive
Analysis
This question tests basic supply and demand. When more homes are for sale than buyers want at current prices, there is excess supply. Excess supply tends to push prices down.
Background Knowledge
Price moves toward the level where supply equals demand. Excess supply puts downward pressure on price, and excess demand puts upward pressure. In real estate, supply adjusts slowly, so price changes often do much of the work of rebalancing.
Real-World Application
After a wave of new listings, an appraiser sees rising inventory, price reductions and longer marketing times. She reports a softening market with downward price pressure supported by recent sales.
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