Future Business Leader Achievments (FBLA) Economics Practice Exam

What occurs when demand exceeds supply in a market?

1. Price decreases

2. Market equilibrium

3. Surplus

4. Price increases

The correct answer is: Price increases

When demand exceeds supply in a market, it creates a situation known as a shortage. In this scenario, the quantity of goods or services that consumers want to purchase is greater than what producers are willing or able to sell at the current price. To address this disparity, sellers may respond by raising prices. This price increase serves to ration the limited supply among consumers who are willing to pay more, thereby restoring balance over time. As prices rise, it may lead to a decrease in quantity demanded as some consumers are priced out of the market, while simultaneously encouraging producers to increase supply due to the higher potential for profit. This dynamic continues until the market reaches a new equilibrium, where the amount supplied meets the amount demanded. In contrast, a price decrease would occur in situations where supply surpasses demand, leading to a surplus, and market equilibrium is the ideal state where supply equals demand, not the direct result of excess demand. Thus, the increase in price in response to excess demand is a fundamental principle in economics that illustrates the mechanisms of market forces.