Supply and Demand

Course: Fundamentals of Financial Planning
Lesson 2: Economic Concepts and Consumer Protection Laws

Student Question:

I missed the below question because I thought number 2 was false. Wouldn’t price and demand move in a correlated way? The more the demand the higher the price?

Which of the following statements concerning supply and/or demand is/are true?

1. If demand increases and supply simultaneously decreases, the equilibrium price will rise.
2. There is an inverse relationship between price and quantity demanded.
3. If demand decreases and supply simultaneously increases, the equilibrium price will fall.
4. If demand decreases and supply remains constant, the equilibrium price will rise.

Thanks.

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Instructor Response:

Good to hear from you.  Great question here. The way to look at this is when the price of something increases, what happens to demand.  It will decrease.  That’s why there is the inverse relationship price and quantity demanded.

To your point, an increase in demand can have an impact on price, but typically it has an impact on supply instead. As demand increases, supply will increase.  

Does that help?  Let me know any other questions.