What happens when demand exceeds supply?

• A. Prices fall
• B. Prices stabilize
• C. Prices rise
• D. Prices become irrelevant

Answer: (C)

When demand exceeds supply, it creates a situation where consumers want to purchase more goods or services than are available in the market. This increased competition among buyers for limited resources typically leads to a rise in prices. Sellers recognize this opportunity and can raise prices because there are more buyers than there are products.

As demand continues to outpace supply, the higher prices act as a signal for producers to increase their output, encouraging them to create more goods or services to capitalize on the profit potential. Thus, the interaction between supply and demand is fundamental in determining market prices, and when demand goes up significantly without a corresponding increase in supply, it invariably results in price increases.