What occurs when the quantity demanded is higher than the quantity supplied?

When the quantity demanded is higher than the quantity supplied, a situation known as a shortage arises. In this scenario, more consumers want to purchase a good or service than what is available in the market at the current price. This imbalance prompts upward pressure on prices, as sellers realize that they can charge more due to the increased demand exceeding the available supply.

In a competitive market, shortages typically lead to increased prices, which in turn incentivizes suppliers to produce more or enter the market, ultimately moving toward a new equilibrium where the quantity demanded equals the quantity supplied. This understanding of shortages is fundamental in analyzing market dynamics in macroeconomics, as it illustrates the relationship between price changes and consumer behavior in response to supply constraints.