If there is a significant undersupply of homes in a market, construction will tend to increase. This is an example of

If there is a significant undersupply of homes in a market, construction will tend to increase. This is an example of

• A. the market tending toward equilibrium
• B. a shrinking market
• C. a market in chaos
• D. a stable market

Answer: (A)

Markets move toward equilibrium when shortages push prices up and encourage more production. Here, the undersupply of homes creates upward pressure on prices. Higher prices make building new homes more profitable, which motivates developers to increase construction. As more homes are built and come onto the market, the gap between supply and demand narrows, guiding the market toward the balance point where supply equals demand. So this illustrates the market tending toward equilibrium. It isn’t a shrinking market, since activity would be decreasing, nor a market in chaos, which implies no predictable adjustment, nor a stable market, which would show no pressure to change.

Markets move toward equilibrium when shortages push prices up and encourage more production. Here, the undersupply of homes creates upward pressure on prices. Higher prices make building new homes more profitable, which motivates developers to increase construction. As more homes are built and come onto the market, the gap between supply and demand narrows, guiding the market toward the balance point where supply equals demand. So this illustrates the market tending toward equilibrium. It isn’t a shrinking market, since activity would be decreasing, nor a market in chaos, which implies no predictable adjustment, nor a stable market, which would show no pressure to change.