What outcome can excess demand in a market lead to for businesses?

Excess demand in a market occurs when the quantity of a good or service that consumers are willing to purchase exceeds the quantity that businesses are willing to supply at a given price. This situation creates a competitive environment among consumers vying for the limited available products, which often leads to an increase in prices.

When demand outstrips supply, businesses recognize the opportunity to raise prices, allowing them to maximize their profits. Higher prices signal to the market that demand is strong and, consequently, can encourage suppliers to increase production or new businesses to enter the market over time.

In contrast, an increase in prices does not decrease customer base or lead to a stabilization of quantity. Instead, higher prices typically result in some consumers potentially dropping out of the market if they decide the prices are no longer affordable. This dynamics highlights the fundamental relationship between supply and demand within economic theory.