Texas Real Estate Brokerage Sales Apprentice Education (SAE) Practice Exam

As supply decreases, what will happen to prices?

1. Remain Stable

2. Increase

3. Decrease

4. Vary

The correct answer is: Increase

When supply decreases in a market, the basic principles of supply and demand indicate that prices will tend to increase. This is because a decrease in supply means there are fewer goods or services available for consumers. If demand remains constant or increases while supply decreases, consumers will compete for the limited available items, often driving the prices upward. This behavior is a fundamental concept in economics. In the context of real estate, if the number of available properties for sale drops, but the number of buyers remains the same or increases, the competition among buyers can lead to bidding wars, ultimately raising property prices. The dynamics of supply and demand play a crucial role in determining price levels, making the increase in prices the logical outcome of a decrease in supply when demand is stable or rising.