Which economic concept explains price movements when demand outpaces supply?

• A. Supply and Demand
• B. Elasticity
• C. Market Equilibrium
• D. Cost Push

Answer: (A)

Supply and demand explains price movements when demand outpaces supply. When too many buyers want the good but there isn’t enough of it, a shortage occurs. In response, prices rise. The higher price discourages some buyers (lowering quantity demanded) and encourages more production or alternative choices, moving the market toward a new balance where the amount supplied meets the amount demanded. This price adjustment is the market’s signal to allocate resources and restore equilibrium.

Elasticity describes how responsive buyers and sellers are to price changes, but it doesn’t by itself explain why prices rise when demand exceeds supply. Market equilibrium is the end state the market moves toward, not the mechanism that explains the initial price change. Cost-push involves rising production costs driving prices up, which is a different cause from a demand-driven shortage.