What occurs when demand in the economy exceeds supply, causing prices to rise?

When demand in the economy exceeds supply, it creates an environment where consumers are competing for limited goods and services. This excess demand leads to an upward pressure on prices, known as demand-pull inflation. Demand-pull inflation occurs when the overall demand in an economy outpaces its ability to produce goods and services, forcing businesses to increase prices as they respond to the heightened competition among consumers.

In this situation, consumers may also find themselves willing to pay higher prices to secure the products they want, further driving inflation. This concept is central to understanding how economic conditions can change and how they influence pricing strategies in markets.

The other answers reference different scenarios or effects. Cost-push refers to inflation caused by rising production costs, supply shock pertains to sudden increases or decreases in supply that affect prices, and price stabilization involves efforts to maintain steady prices, which is not a result of demand exceeding supply.