What happens to prices when demand exceeds supply?

When demand exceeds supply, prices typically increase. This phenomenon occurs because consumers are willing to pay more for a limited quantity of goods or services available in the market. When many buyers compete for a scarce resource, sellers can raise prices, knowing that buyers are motivated to pay to secure what they want.

This situation is rooted in the fundamental economic principles of supply and demand, where increased demand coupled with stagnant or reduced supply creates upward pressure on prices. As prices rise, it may eventually balance out the market by either incentivizing producers to supply more or discouraging some buyers from making their purchase, depending on how elastic the demand for the product is.

In contrast, when demand is lower than supply, prices typically fall, and when demand and supply are equal, prices remain more stable. Fluctuating prices may occur in varying circumstances, but when straightforward demand exceeds supply, the predictable trend is that prices increase.