Which term describes a situation where market prices drop as demand decreases?

The term that accurately describes a situation where market prices drop as demand decreases is deflation. Deflation occurs when the overall prices of goods and services decline, which often results from a decline in consumer demand. When demand decreases, sellers may lower their prices to attract buyers, leading to a general reduction in price levels in the economy.

Deflation can have several implications, such as reduced consumer spending, as people may anticipate that prices will continue to fall and thus choose to delay purchasing decisions. This can create a cycle that further exacerbates the decrease in demand and, in turn, contributes to a decline in prices.

In contrast, inflation refers to a general increase in prices due to rising demand or costs. A recession signifies a period of economic decline typically characterized by falling GDP and employment, whereas stability indicates a situation in which prices and economic activity remain consistent over time. Understanding these distinctions clarifies why deflation is the right term for a scenario where prices drop as demand reduces.