Real Estate Council of Alberta Fundamentals Practice Exam

In microeconomics, what does the law of demand state?

1. As price increases, demand increases

2. As price decreases, demand increases

3. Demand remains constant regardless of price

4. Supply will always meet demand

The correct answer is: As price decreases, demand increases

The law of demand illustrates a fundamental principle in microeconomics that describes the relationship between price and the quantity demanded by consumers. Specifically, it states that as the price of a good or service decreases, the quantity demanded increases, assuming all other factors remain constant. This negative relationship highlights consumer behavior; when prices are lower, consumers tend to buy more, while higher prices discourage purchasing. Understanding the concept in the context of consumer behavior is crucial. If a product is priced attractively, it becomes more appealing to consumers, often leading to increased sales. Conversely, when prices rise, the purchasing power of consumers diminishes, and they are likely to buy less of that good or potentially switch to alternatives. In addressing the other options: the first option suggests that demand increases with rising prices, which contradicts the established law. The third choice implies that demand is unaffected by price, which is inconsistent with consumer behavior. The fourth option discusses supply in relation to demand, which is a different economic principle and not specifically tied to the law of demand. Understanding these distinctions helps clarify why the correct answer aligns with the accepted economic framework.