Question

the law of supply and demand
quiz complete
1 2
how do changing prices affect supply and demand?
○ as price increases, both supply and demand increase.
○ as price decreases, both supply and demand decrease.
○ as price increases, supply decreases, but demand increases.
○ as price decreases, supply decreases, but demand increases.

Explanation:

To solve this, we recall the law of supply and demand:

• Supply: There is a direct relationship between price and quantity supplied (ceteris paribus). So, as price increases, suppliers are willing to supply more (supply increases), and as price decreases, suppliers supply less (supply decreases).
• Demand: There is an inverse relationship between price and quantity demanded (ceteris paribus). So, as price increases, consumers demand less (demand decreases), and as price decreases, consumers demand more (demand increases).

Now let's analyze each option:

• Option 1: "As price increases, both supply and demand increase" → Demand should decrease when price increases, so this is wrong.
• Option 2: "As price decreases, both supply and demand decrease" → Demand should increase when price decreases, so this is wrong.
• Option 3: "As price increases, supply decreases, but demand increases" → Supply should increase when price increases, so this is wrong.
• Option 4: "As price decreases, supply decreases, but demand increases" → This matches the relationships: lower price leads to less supply (suppliers are less willing) and more demand (consumers are more willing).

Answer:

D. As price decreases, supply decreases, but demand increases.