Question

How does Supply and Demand work?

A. As supply increases, demand increases
B. As demand decreases, supply decreases
C. As supply decreases, demand increases
D. Supply and demand are equal always

Answer 1

The concepts of supply and demand are fundamental in economics and illustrate how prices and quantities of goods and services are determined in a market. Here's a brief overview of how they interact:

1. **Supply** refers to the total amount of a good or service that producers are willing and able to sell at a given price.
2. **Demand** refers to the total amount of a good or service that consumers are willing and able to purchase at a given price.

The relationship between supply and demand can be summarized as follows:

- When **supply increases**, it often leads to a decrease in price, which can increase demand (since lower prices usually attract more buyers).
- When **demand decreases**, prices usually fall, which can lead to a reduction in supply because producers may not find it profitable to sustain increased output.
- Conversely, when **supply decreases**, prices tend to rise, which can lead to a decrease in demand (as higher prices can deter some consumers).
- **Supply and demand are not always equal.** They may reach an equilibrium where quantity supplied equals quantity demanded, but various factors can lead to shifts in either supply or demand, creating imbalances.

Based on this understanding, the correct answer to the question hinges on the negative correlation often exhibited between supply and demand.

- The closest statement that accurately reflects this relationship is **C. As supply decreases, demand increases.**

However, it's also important to note that demand can vary based on many external factors, affecting its relationship with supply.