How do supply and demand affect prices in a market economy?

How do supply and demand affect prices in a market economy?

• A. Prices rise when demand is high and supply is high.
• B. Prices rise when demand is low and supply is low.
• C. High demand with limited supply raises prices.
• D. Prices are fixed regardless of supply and demand.

Answer: (C)

Prices in a market respond to the balance between what buyers want and what sellers have available. When many people want a good but only a small amount is available, competition among buyers pushes the price up. The higher price helps ration the scarce supply and encourages more of the good to be produced or sold, until the market reaches a new balance. That scenario—strong demand coupled with limited supply—causes prices to rise. If demand is low or supply is ample, prices tend to stay the same or fall, and prices are not fixed; they move to reflect how scarce or desirable a good is.

Prices in a market respond to the balance between what buyers want and what sellers have available. When many people want a good but only a small amount is available, competition among buyers pushes the price up. The higher price helps ration the scarce supply and encourages more of the good to be produced or sold, until the market reaches a new balance. That scenario—strong demand coupled with limited supply—causes prices to rise. If demand is low or supply is ample, prices tend to stay the same or fall, and prices are not fixed; they move to reflect how scarce or desirable a good is.