What typically happens to prices when demand exceeds supply?

What typically happens to prices when demand exceeds supply?

• A. Prices decrease
• B. Prices stabilize
• C. Prices increase
• D. Prices become volatile

Answer: (C)

When demand exceeds supply, it creates a situation where consumers are willing to pay more for the limited quantity of goods or services available. This imbalance between high demand and low supply forces prices to rise, as sellers have the opportunity to increase prices in response to the competitive pressure among buyers. In a typical market scenario, when more people want to purchase a product than there are products available, this increased willingness to pay leads to higher prices. The price increase acts as a signal to producers to supply more of the product if possible, which may help restore equilibrium in the market eventually. Thus, the correlation between excess demand and rising prices is a fundamental principle of economics known as the law of supply and demand.

When demand exceeds supply, it creates a situation where consumers are willing to pay more for the limited quantity of goods or services available. This imbalance between high demand and low supply forces prices to rise, as sellers have the opportunity to increase prices in response to the competitive pressure among buyers.

In a typical market scenario, when more people want to purchase a product than there are products available, this increased willingness to pay leads to higher prices. The price increase acts as a signal to producers to supply more of the product if possible, which may help restore equilibrium in the market eventually. Thus, the correlation between excess demand and rising prices is a fundamental principle of economics known as the law of supply and demand.