Which statement best describes the Law of Supply and Demand?

Which statement best describes the Law of Supply and Demand?

• A. An economic force explaining the interaction between the supply of a resource and the demand for that resource.
• B. A budgetary rule for government spending.
• C. A method of computing profits in a firm.
• D. A policy for setting interest rates.

Answer: (A)

Markets work as buyers and sellers interact to set prices and the quantities exchanged. The statement that best describes the Law of Supply and Demand is that it explains the interaction between the supply of a resource and the demand for that resource. When demand rises relative to supply, prices tend to increase, and producers respond by increasing output, pushing the market toward a higher equilibrium quantity. When supply grows or demand falls, prices tend to decrease, and quantity traded moves toward a lower equilibrium. The outcome is the equilibrium price and quantity where supply and demand balance. This idea is different from a government budgeting rule, a method for computing profits, or a policy for setting interest rates, which relate to other areas of economics.

Markets work as buyers and sellers interact to set prices and the quantities exchanged. The statement that best describes the Law of Supply and Demand is that it explains the interaction between the supply of a resource and the demand for that resource. When demand rises relative to supply, prices tend to increase, and producers respond by increasing output, pushing the market toward a higher equilibrium quantity. When supply grows or demand falls, prices tend to decrease, and quantity traded moves toward a lower equilibrium. The outcome is the equilibrium price and quantity where supply and demand balance. This idea is different from a government budgeting rule, a method for computing profits, or a policy for setting interest rates, which relate to other areas of economics.