Final answer:
When demand increases and supply decreases, it causes a shortage in the market leading to higher prices. This situation is akin to the effects of a price ceiling set below equilibrium price, where the quantity demanded rises and quantity supplied falls.
Step-by-step explanation:
If demand increases and supply decreases, this typically leads to an imbalance where the quantity demanded exceeds the quantity supplied at the current price, creating a shortage in the market. In response to such a shortage, sellers recognize that they can increase prices, causing the market price to rise. Therefore, the correct answer to this question is D. higher prices.
Consider a situation in economics similar to a price ceiling set below the equilibrium price. A price ceiling is a type of legal restriction which causes the quantity demanded to rise and the quantity supplied to fall, thus creating a shortage. When a market experiences a shortage, the result is often that sellers have the opportunity to sell their goods at higher prices, thus leading to an increase in the market price towards the equilibrium level. This is why a decrease in supply, coupled with an increase in demand, does not result in chaos, lower prices, or equilibrium, but rather leads to higher prices.