Economics World Bank Questions
The concept of supply and demand is a fundamental principle in economics that explains the relationship between the quantity of a good or service that producers are willing to provide and the quantity that consumers are willing to purchase at a given price.
Supply refers to the quantity of a good or service that producers are willing and able to offer for sale at various prices. It is influenced by factors such as production costs, technology, and the number of producers in the market. The law of supply states that as the price of a good or service increases, the quantity supplied also increases, ceteris paribus (all other factors remaining constant).
Demand, on the other hand, refers to the quantity of a good or service that consumers are willing and able to purchase at various prices. It is influenced by factors such as consumer preferences, income levels, and the price of related goods. The law of demand states that as the price of a good or service increases, the quantity demanded decreases, ceteris paribus.
The interaction between supply and demand determines the equilibrium price and quantity in a market. When the quantity demanded equals the quantity supplied at a particular price, the market is said to be in equilibrium. If the price is above the equilibrium level, there is a surplus, and producers may lower prices to sell excess supply. Conversely, if the price is below the equilibrium level, there is a shortage, and producers may increase prices to meet the excess demand.
Overall, the concept of supply and demand helps to explain how prices are determined in a market economy and how changes in supply or demand can affect market outcomes.