In a competitive market, what happens to prices when demand increases?

When demand increases in a competitive market, it typically leads to an increase in prices. This occurs because, as more consumers want to purchase a good or service, the available supply may not meet the heightened demand. In response to the increased demand, sellers can raise their prices, reflecting the higher value consumers place on the product.

This price adjustment serves as a signal to producers to increase supply, as higher prices may indicate greater profitability. As production ramps up to meet demand, the market can eventually reach a new equilibrium where the quantity supplied matches the quantity demanded at a higher price level. Thus, the dynamics of supply and demand effectively drive prices higher in response to increased demand.

In contrast, if demand were to decrease, prices would likely fall, and if they remained constant, it would suggest that supply and demand were balanced or that other market conditions are at play. Unpredictable price changes would indicate a lack of stability in demand and supply movements, which is not the standard outcome in a competitive market responding to increased demand.