What is the effect of excessive demand combined with inadequate supply?

The correct answer, demand-pull inflation, occurs when excessive demand outstrips the available supply of goods and services in the market. This imbalance creates upward pressure on prices, as consumers are willing to pay more to secure the limited products they desire. When demand is high and exceeds supply, businesses can increase their prices because customers are competing for the same resources.

The dynamics of demand-pull inflation illustrate a fundamental economic principle that when the demand for products or services rises sharply, it can lead to an overall increase in the price level across the economy, resulting in inflation. This phenomenon is distinct from other choices, which do not accurately describe the impact of the specific situation of high demand paired with insufficient supply.

In contrast, price stability refers to a situation where prices do not fluctuate significantly or continuously rise, which is not the case here. Marketplace saturation occurs when a market has reached a point where the available supply meets or exceeds demand, leading to reduced sales or stagnation. Economic equilibrium is the state in which supply equals demand, which contrasts sharply with the scenario posed in the question, where supply is inadequate to meet excessive demand.