Association of Chartered Certified Accountants (ACCA) Certification Practice Test

In economics, what is the relationship between supply and demand typically described as?

1. Direct correlation

2. Inverse correlation

3. Dependence

4. Independence

The correct answer is: Inverse correlation

The relationship between supply and demand is typically described as an inverse correlation. This means that as the price of a good or service increases, the quantity supplied tends to increase while the quantity demanded generally decreases. Conversely, if the price decreases, the quantity supplied usually decreases while the quantity demanded increases. This fundamental principle of economics demonstrates how consumers and producers respond to changes in price, reflecting their respective behaviors in the market. In contrast, direct correlation would imply that both supply and demand move in the same direction with price changes, which is not the case in standard market conditions. Dependence suggests that supply and demand are entirely reliant on each other, ignoring the effects of price changes distinctly, which doesn’t accurately characterize their relationship. Independence would indicate that changes in one do not affect the other at all, which is also not reflective of their interactions in economic contexts. Thus, recognizing the inverse relationship is crucial for understanding how markets function.