To determine whether the statement "When prices are below equilibrium, a surplus exists" is true or false, we need to understand the concept of equilibrium price and how it relates to supply and demand.
1. Equilibrium Price: This is the price at which the quantity of goods supplied is equal to the quantity of goods demanded. At this point, the market is in balance, and there is neither a surplus nor a shortage of goods.
2. Surplus: A surplus occurs when the quantity supplied exceeds the quantity demanded at a given price. This situation typically arises when prices are above the equilibrium level because producers are willing to supply more goods, but consumers are not willing to buy as much, leading to excess supply.
3. Shortage: A shortage occurs when the quantity demanded exceeds the quantity supplied at a given price. This usually happens when prices are below the equilibrium level because consumers want to buy more at the lower price, but producers are not willing to supply enough, leading to excess demand.
Let's apply this understanding to the statement:
"When prices are below equilibrium, a surplus exists."
- If prices are below the equilibrium level, consumers will demand more goods because the prices are lower.
- However, producers will supply fewer goods because they are not receiving enough compensation to cover their costs or make a profit.
- This mismatch results in a shortage, not a surplus.
Therefore, the statement that a surplus exists when prices are below equilibrium is incorrect.
So, the correct answer is:
○ False
