Canadian Securities Course (CSC) Level 1 Practice Exam

Explain supply and demand.

1. Demand: Price increases, demand increases. Supply: Price increase, quantity supplied decreases.

2. Demand: Price decreases, demand decreases. Supply: Price increases, quantity supplied increases.

3. Demand: Price decreases, demand increases. Supply: Price decreases, quantity supplied decreases.

4. Demand: Price increases, demand decreases. Supply: Price decreases, quantity supplied increases.

The correct answer is: Demand: Price increases, demand increases. Supply: Price increase, quantity supplied decreases.

The correct choice presents an accurate view of how supply and demand interact in the market. In the context of demand, when the price of a good or service increases, consumers tend to buy less of it; thus, demand decreases. This is known as the law of demand. Conversely, in terms of supply, when prices increase, producers are generally incentivized to supply more of the good or service to the market, leading to an increase in the quantity supplied. This aligns with the law of supply, which states that there is a direct relationship between price and quantity supplied. This understanding of how supply responds to price changes and how demand does the opposite is fundamental in economics. Demand usually decreases when prices rise due to consumers seeking alternatives or budgeting constraints, whereas suppliers are motivated to increase production when they can charge higher prices, seeing the potential for greater profit. The other choices do not accurately reflect these economic principles. For instance, these alternatives suggest scenarios where an increase or decrease in price leads to demand and supply changes that contradict typical market behavior.