If demand increases relative to supply, which typically happens?

If demand increases relative to supply, which typically happens?

• A. Lower prices
• B. Price increases
• C. Quantity demanded decreases
• D. Supply increases

Answer: (B)

When demand rises relative to supply, buyers are willing to pay more and there’s more competition for the available goods. That extra competition pushes the price up to clear the market, creating a new equilibrium at a higher price. As prices rise, producers have an incentive to supply more, so the overall quantity traded often ends up higher than before too. The other outcomes don’t fit this situation: prices wouldn’t typically fall when demand outpaces supply; a drop in quantity demanded isn’t the initial result of a demand increase; and simply increasing supply would tend to lower prices rather than raise them.

When demand rises relative to supply, buyers are willing to pay more and there’s more competition for the available goods. That extra competition pushes the price up to clear the market, creating a new equilibrium at a higher price. As prices rise, producers have an incentive to supply more, so the overall quantity traded often ends up higher than before too. The other outcomes don’t fit this situation: prices wouldn’t typically fall when demand outpaces supply; a drop in quantity demanded isn’t the initial result of a demand increase; and simply increasing supply would tend to lower prices rather than raise them.