Hey there!
When we're talking about supply and demand, there's a lot of laws with them that might be kind of annoying to memorize at first, but if you apply it into the real world it all makes a lot of sense. Let's think about the increase and decrease of supply and demand below.
SUPPLY DECREASES
Let's say that Apple releases a new iPhone model that we'll call the iPhone 2000, except there is only one iPhone 2000 that they could produce. It is a super cool top notch iPhone but the supply is low because they don't have a large supply iPhone 2000s. Because of this, it is very valuable because it's the only iPhone of it's type, so the price is going to be a lot higher because it has more value.
SUPPLY INCREASES
If Apple made 1,000,000 new IPhone 2000s, on the other hand, they would naturally be worth less because they are much more common. Therefore, their price would naturally go down.
DEMAND INCREASES
Because this is a new release, more people will want to buy it because it's a super cool new iPhone, so there is higher demand. Because of this, Apple is going to raise the prices because they don't want to run out and they want to make more money off of their iPhone 2000 because so many people want it.
DEMAND DECREASES
Let's say that a week after the release of the iPhone 2000, Samsung releases a new phone that is even higher tech. Then, less people are going to want the new iPhone, but rather the new Samsung phone! Therefore, the demand for the iPhone 2000 will be decreasing, so what Apple will do is lower the price of the phone so that more people will want to get a good phone on a deal. If their phone costs a lot less than the Samsung, more people will want to buy the Apple because it's better on their wallets and they still get a nice phone.
From this scenario, we can deduce the following ideas.
IF SUPPLY INCREASES, PRICES DECREASE.
IF SUPPLY DECREASES, PRICES INCREASE.
IF DEMAND INCREASES, PRICES INCREASE.
IF DEMAND DECREASES, PRICES DECREASE.
Now, let's look at your answer options.
A) As demand increases, prices go up.
This is true because if tons of people want a product, the company doesn't want everything to get sold out so quickly, so they will increase the price because it has a lot of value to the people.
B) As demand decreases, prices go down.
This is also true according to the laws we created because if people don't want something, they will more likely want it more if the price is lower, which is what companies usually do when demand decreases.
C) As demand increases and supply decreases, prices go up.
This statement is basically the same as A but also adds the concept of supply in as well, and we have shown that when supply decreases, prices will go down, so this statement is also true.
D) As demand increases and supply decreases, prices go down.
This statement is false because as we have proven, prices go down when demand decreases and when supply increases, not the opposite.
So, as you can see, we have three answer options we can choose from, A,B, and C. Our question is how prices are governed. A and B talk about demand, while C talks about supply <em>and </em>demand. The prices are governed by both supply and demand because they are both factors that we have seen play a key role in prices.
Therefore, our answer is C) As demand increases and supply decreases, prices go up.
I hope that this helps! Have an awesome day!
