The law of supply and demand states that

• A. When supplies are plentiful, prices rise
• B. When supplies are scarce, prices fall
• C. When supplies are plentiful, prices tend to drop; when scarce, prices tend to rise
• D. Prices are fixed and do not respond to supply

Answer: (C)

Prices move to balance how much of a good is available with how much people want to buy. When supplies are plentiful, sellers have more product than buyers want, so competition among sellers pushes prices down to clear the excess. When supplies are scarce, there isn’t enough for all buyers, so prices rise, signaling producers to supply more and buyers to buy less until the market reaches balance. This is why the statement describing the effect—price tends to drop with abundant supply and rise with scarce supply—best reflects how supply and demand interact. The idea that prices are fixed or that they rise with plenty or fall with scarcity doesn’t fit how markets adjust to changes in supply.