A local bakery is experiencing a surge in demand for its specialty cakes due to a recent social media trend. The owner decides to increase the price of the cakes to capitalize on this demand. What is the likely economic outcome of this decision in terms of supply and demand principles?

The bakery’s price hike will raise the cake’s market price, so buyers will purchase fewer cakes because the higher cost makes them less attractive. At the same time, the higher price signals to the bakery that it can earn more per cake, which may encourage it to bake more or hire extra staff, slightly increasing supply. The net result is a lower equilibrium quantity: fewer cakes sold overall, but each sold cake brings in more revenue. For example, if a cake’s price rises from $20 to $30 and demand drops by 20 %, the bakery sells fewer cakes but earns more per sale, which can offset the reduced volume.