What happens to prices when there is low supply and high demand?

• A. No change
• B. Higher prices
• C. Lower prices
• D. Equilibrium

Answer: (B)

When demand is high and supply is low, goods are scarce and buyers compete for the limited amount available. That competition pushes prices upward because those willing to pay more bid up the market. The rising price serves as a signal to producers to increase supply or for new suppliers to enter the market, while some buyers cut back, reducing quantity demanded. In the short run, this dynamic usually results in higher prices. If supply can’t catch up or demand remains strong, prices stay elevated until a new balance is found.