What does the principle of 'demand and supply' explain?

The principle of 'demand and supply' fundamentally explains the interaction between the amount of a product available in the market and the desire of consumers to purchase that product. It illustrates how various factors can influence both the quantity of goods available and consumer behavior.

When demand increases, often due to changes in consumer preferences or income levels, the price might rise if supply remains constant, leading to a potential shortage. Conversely, if supply increases and demand stays the same, prices may fall, creating a surplus. This dynamic helps to establish the market equilibrium price, which is where the quantity of goods supplied matches the quantity demanded. Understanding this principle is vital for analyzing how markets operate and how prices are determined.

The other options touch on various aspects of business and economics but do not directly encapsulate the core principle of 'demand and supply' as clearly and accurately as the chosen answer does.