Prices will rise if there is excess demand. True False
The correct answer and explanation is:
True.
Excess demand occurs when the quantity of a good or service demanded by consumers exceeds the quantity supplied at a given price. This imbalance creates pressure on prices to rise. In a competitive market, sellers typically respond to higher demand by increasing prices, as consumers are willing to pay more for limited goods or services.
The law of supply and demand states that when demand increases while supply remains constant, prices tend to rise. This is because consumers, motivated by their desire to acquire the product, bid more aggressively, and sellers, seeing an opportunity for higher profit, raise prices. Conversely, if supply exceeds demand, sellers may lower prices to attract more buyers or reduce inventory.
Excess demand is most commonly observed in situations like product shortages or during periods of increased consumer interest, such as during seasonal peaks or when new, highly anticipated products are released. A common example is the release of a new smartphone model, where initial demand often exceeds the number of units available, leading to higher prices or the need for waiting lists.
In summary, when there is excess demand in a market, the scarcity of goods or services drives up prices as both consumers and producers adjust their behavior to reflect the new economic conditions. The increase in price helps restore equilibrium, where supply matches demand.