What does the term 'supply and demand' describe in economics?

What does the term 'supply and demand' describe in economics?

• A. A method for setting interest rates
• B. An analysis of consumer behavior
• C. A model for price determination in a market
• D. A strategy for minimizing investment risk

Answer: (C)

The term 'supply and demand' describes a fundamental model for price determination in a market. This model explains how the quantity of a good or service that producers are willing to sell (supply) and the quantity that consumers are willing to buy (demand) interact to set the market price. When demand for a product increases and supply remains constant, prices tend to rise, creating a situation where consumers compete for the limited quantity available. Conversely, if supply increases while demand remains constant, prices tend to fall as sellers compete to attract buyers. This dynamic interaction helps to balance the market, establishing what is known as the equilibrium price, where the quantity supplied equals the quantity demanded. Understanding this model is crucial for analyzing how various factors, like consumer preferences or changes in production costs, can impact pricing and availability of goods in an economy. It emphasizes the importance of both market forces in determining prices and illustrates the principles underlying market economies.

The term 'supply and demand' describes a fundamental model for price determination in a market. This model explains how the quantity of a good or service that producers are willing to sell (supply) and the quantity that consumers are willing to buy (demand) interact to set the market price.

When demand for a product increases and supply remains constant, prices tend to rise, creating a situation where consumers compete for the limited quantity available. Conversely, if supply increases while demand remains constant, prices tend to fall as sellers compete to attract buyers. This dynamic interaction helps to balance the market, establishing what is known as the equilibrium price, where the quantity supplied equals the quantity demanded.

Understanding this model is crucial for analyzing how various factors, like consumer preferences or changes in production costs, can impact pricing and availability of goods in an economy. It emphasizes the importance of both market forces in determining prices and illustrates the principles underlying market economies.