Question

which explains the connection between the law of demand and excess demand? the law states that increases in price leads to greater supply and equilibrium, which occurs during excess demand. the law states that decreases in price leads to greater quantity demanded and limited supply, which occurs during excess demand. the law states that decreases in price leads to greater supply and equilibrium, which occurs during excess demand. the law states that increases in price increases leads to greater quantity demanded and limited supply, which occurs during excess...

Explanation:

To solve this, we analyze the law of demand and excess demand:

Step 1: Recall the Law of Demand

The law of demand states that, ceteris paribus, a decrease in price leads to a greater quantity demanded (and an increase in price leads to a smaller quantity demanded).

Step 2: Analyze Excess Demand

Excess demand occurs when quantity demanded exceeds quantity supplied. During excess demand, suppliers may not be able to meet the high demand immediately (so supply is limited in the short run), and lower prices (or the expectation of lower prices) would drive consumers to demand more.

Now, evaluate the options:

• First option: Talks about “increase in price → greater supply” (relates to supply, not demand) → Incorrect.
• Second option: “Decreases in price leads to greater quantity demanded and limited supply, which occurs during excess demand.” → Matches the law of demand (price down → quantity demanded up) and excess demand (limited supply relative to demand) → Correct.
• Third option: “Decreases in price → greater supply” (supply, not demand) → Incorrect.
• Fourth option: “Increase in price → greater quantity demanded” (violates law of demand) → Incorrect.

Answer:

The correct option is the second one: "The law states that decreases in price leads to greater quantity demanded and limited supply, which occurs during excess demand."