Which best describes the relationship between supply and demand?

The relationship between supply and demand is fundamentally integral to economic theory, specifically in determining market equilibrium. Supply and demand are not static; they dynamically interact with one another. When the quantity of a good or service supplied meets the quantity demanded, market equilibrium is achieved—this point indicates the price at which consumers are willing to purchase and producers are willing to sell.

When demand increases—perhaps due to a change in consumer preferences or an increase in income—this can lead to higher prices as consumers are willing to pay more for the limited quantity available. In response, producers may increase supply to take advantage of higher prices. Conversely, if supply exceeds demand, prices tend to fall, leading suppliers to reduce production.

This interaction showcases how variations in supply and demand can respectively influence market prices and quantities, constantly shifting toward equilibrium. Understanding this relationship is crucial for analyzing market trends and making informed economic decisions.