Why do prices increase when demand for a product is high?

companies know they can make more money by selling more products at higher prices.
companies know that people will be willing to spend more to get an in-demand product.
companies take advantage of the demand to make people spend more money on excess products.
companies know they can stop production and still make money on sales.

The correct option is (B). When the demand for goods or services is high, prices increase because companies know that people will be willing to spend more to get an in-demand product.

Further Explanation:

Law of Demand:

According to the law of demand, when the price of the goods increases, quantity demanded will fall, and when the price of the goods decreases, the quantity of good demanded will increase while other things remain constant. So, the price of the pants increase, the quantity demanded will decrease.

Justification for the correct and incorrect option:

(A)

Companies know they can make more money by selling more products at higher prices: This option is incorrect.

If the companies increase the supply of the product in the market, then it will put downward pressure on the prices. Hence companies will not be able to earn more.

(B)

Companies know that people will be willing to spend more to get an in-demand product: This option is correct.

When the demand for goods and services is high, prices increase because companies know that people will be willing to spend more to get an in-demand product, and companies will be able to earn more profit.

(C)

Companies take advantage of the demand to make people spend more money on excess products: This option is incorrect.

The high demand will increase the prices of the goods, and Consumers will only buy the quantity they need, not in excess of what they need.  

(D)

Companies know they can stop production and still make money on sales: This option is incorrect.

The companies cannot stop production because if they stop production, they will not be able to sell products in the market.

Learn more:

1.Learn more about the demand and supply

2.Learn more about the demand curve

3.Learn more about the effect of demand

Answer details:

Grade: Middle School

Subject: Economics

Chapter: Law of Demand

Keywords: Law of Demand, demand for a product is high, prices increase, by selling more products at higher prices, to get an in-demand product, can stop production.

answer; synthetic production system;

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