WEST-E Social Studies Practice Test

Which economic concept explains the relationship between supply and demand?

1. Market equilibrium

2. Price elasticity

3. Opportunity cost

4. Utility maximization

The correct answer is: Market equilibrium

Market equilibrium is the economic concept that describes the relationship between supply and demand in a marketplace. At market equilibrium, the quantity of goods supplied matches the quantity demanded, resulting in a stable market price. This balance occurs at a specific price point, where consumers are willing to purchase the exact amount of a product that producers are willing to sell. When there are shifts in either supply or demand, the market adjusts to return to equilibrium. If demand increases, prices tend to rise until a new equilibrium is established, whereas if supply decreases, prices may also increase to reflect the lower availability of goods. Thus, market equilibrium effectively illustrates how supply and demand interact to determine the price and quantity of goods in an economy. The other concepts—price elasticity, opportunity cost, and utility maximization—while relevant to economic theory, do not directly describe the fundamental relationship between supply and demand as market equilibrium does. Price elasticity pertains to how much the quantity demanded or supplied will change in response to a change in price. Opportunity cost refers to the value of the next best alternative that is foregone when making a choice. Utility maximization involves choices made by consumers to achieve the highest satisfaction from their limited resources. Each of these concepts operates within the larger framework of supply and