In a perfectly competitive market, there is excess demand for a good…

In a perfectly competitive market, there is excess demand for a good at the going price, and its price rises. What does this rise in price signal to the producers of the good?

Answer & explanation

Correct answer: option 1

The correct answer is Option (1) → Society as a whole wants more of the good than is currently being produced.

Under perfect competition, excess demand pushes the price up. In a market, a price rise signals to producers that society wants more of the good than is now produced. They are then likely to increase their production.

Option (1) Society as a whole wants more of the good than is currently being produced. — Correct. This is the information the higher price carries.

Option (2) Society as a whole wants less of the good than is currently being produced. — Incorrect. A higher price signals that society wants more of the good.

Option (3) The good is now scarcer, so producers should hold back their output. — Incorrect. The signal leads producers to produce more.

Option (4) Their production already matches what society wants. — Incorrect. Excess demand means buyers want more than is supplied, so output falls short of what society wants.

This question uses Introduction to Microeconomics (price signals) and Market Equilibrium (excess demand) together.

NCERT (2026-27): “1.3.2 The Market Economy … The price reflects, on an average, the society’s valuation of the good or service in question. If the buyers demand more of a certain good, the price of that good will rise. This signals to the producers of that good that the society as a whole wants more of that good than is currently being produced and the producers of the good, in their turn, are likely to increase their production. In this way, prices of goods and services send important information to all the individuals across the market and help achieve coordination in a market system. …”

“Introductory Microeconomics, Chapter 5 Market Equilibrium, Out-of-equilibrium Behaviour From the time of Adam Smith (1723-1790), it has been maintained that in a perfectly competitive market an ‘Invisible Hand’ is at play which changes price whenever there is imbalance in the market. Our intuition also tells us that this ‘Invisible Hand’ should raise the prices in case of ‘excess demand’ and lower the prices in case of ‘excess supply’. …”