Final answer:
A sudden increase in demand for a popular toy will likely cause sellers to raise the price to manage the shortage created by the demand exceeding supply. Sellers may also increase the quantity supplied if they anticipate continued demand and have the capacity to do so. Buyers may respond to higher prices by purchasing less or opting out entirely, although some may still be willing to pay more for 'must-have' items.
Step-by-step explanation:
If there is a sudden increase in the demand for a popular toy in your city, the likely initial impact will be on the price and the behavior of buyers and sellers in the market. Sellers may choose to raise the price due to the higher demand, and because the quantity demanded at the previous price now exceeds the quantity supplied. This creates a shortage, and the higher price serves to ration the limited supply among buyers.
From the seller's perspective, a higher price is advantageous as it increases revenue. If they anticipate that the demand will continue to be high, they may also respond by attempting to increase the quantity supplied, possibly by ordering more stock or increasing production if they are the manufacturer. However, this depends on their capacity and the speed with which they can respond to market signals.
On the buyer's side, the increased price might cause them to reconsider their purchasing decision. Some buyers may opt out of buying the toy due to the higher price, while others may still purchase but in smaller quantities. If the toy is perceived as a 'must-have' item or if it carries significant social status, some buyers may be willing to pay even more, exacerbating the upward pressure on price.
In a monopolistic competition scenario, such as the one posed by the student's question, the supplier has some freedom to set prices due to the differentiated nature of the product. This means that the increase in demand, probably due to successful advertising, can lead to both higher prices and higher production. The extent of these changes will depend on several factors including production costs, the elasticity of demand, and the duration of the increased demand.