What characterizes an economy when the law of demand is in effect?

An economy characterized by the law of demand demonstrates that as the price of a good or service increases, the quantity demanded by consumers typically decreases. This is based on the fundamental principle that consumers are generally less willing to purchase goods at higher prices and will either seek alternatives or reduce their overall consumption of that product.

When the price of an item rises, it may push consumers to either buy less of that item or find substitutes that fulfill the same need at a lower cost. This inverse relationship between price and quantity demanded is crucial in understanding market behavior and consumer choices. Thus, it is accurate to say that higher prices lead to reduced consumer demand, firmly capturing the essence of the law of demand in action.

The other options do not align with this principle. For instance, lower prices leading to decreased consumer demand contradicts the typical behavior outlined by the law of demand, where lower prices usually incentivize more purchasing.