Affiliate Broker Tennessee (TN PSI) National Practice Exam `

What economic principle states that as supply increases, prices tend to decrease?

1. Demand and supply

2. Market equilibrium

3. Supply and demand

4. Cost-benefit analysis

The correct answer is: Supply and demand

The economic principle that states that as supply increases, prices tend to decrease is rooted in the relationship between supply and demand. When the supply of a good or service rises while demand remains constant, there is generally more of the product available than consumers are willing to buy at the existing price. As a result, sellers may reduce prices to attract buyers and clear their excess inventory. This principle is crucial for understanding how market dynamics operate. In a functioning market, prices adjust based on the quantity of goods available. When supply is plentiful, it creates downward pressure on prices, illustrating how supply and demand interact to reach a balance in the market. The other options, while related to economic concepts, do not specifically address the relationship between increasing supply and decreasing prices. For instance, market equilibrium refers to the point where supply equals demand, rather than the direct relationship between supply increases and price decreases. Cost-benefit analysis is a decision-making tool that evaluates the overall benefit versus the cost of a decision rather than focusing specifically on supply and demand dynamics.