Affiliate Broker Tennessee (TN PSI) National Practice Exam `

Which economic principle pertains to the interaction of supply and demand?

1. Monopoly

2. Inflation

3. Competition

4. Barriers to entry

The correct answer is: Competition

The principle that pertains to the interaction of supply and demand is centered on competition. Competition in a market occurs when multiple producers are vying to offer their goods or services to consumers. This rivalry among sellers influences pricing and availability in response to consumer demand and supply levels. When demand for a product is high and supply is limited, competition among sellers can drive prices up as they strive to capture the market. Conversely, when there is an oversupply of a product and demand diminishes, competition typically leads to lower prices, benefiting consumers. Thus, competition is a crucial factor in how supply and demand interact, shaping market dynamics. In contrast, the other options represent different economic concepts that do not directly involve the immediate interplay of supply and demand. Monopoly refers to a market structure dominated by a single seller, reducing competition. Inflation is a general increase in prices and fall in the purchasing value of money, while barriers to entry are obstacles that prevent new competitors from easily entering an industry or area of business. These concepts influence economic conditions but are not centered on the direct interaction of supply and demand.