In a market with excess demand, what is the likely effect on price?

• A. Price will rise
• B. Price will fall
• C. Price will stay the same
• D. Price will become negative

Answer: (A)

When there is excess demand, more people want to buy than there are goods available at the current price. Prices act as a signal that coordinates supply and demand. With a shortage, buyers are willing to pay more, and producers have an incentive to supply more. As the price rises, quantity supplied increases and quantity demanded falls, narrowing the shortage until a new equilibrium is reached. So the price is likely to rise. A fall would worsen the shortage, keeping the price from clearing; staying the same would leave the imbalance unresolved; a negative price isn’t a typical outcome in normal markets.