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How do supply and demand determine the price and quantity?
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Supply and demand determine the price and quantity of a product through
price determination and market equilibrium
. This means that the price and quantity of a product are set by the interaction of supply and demand in a market.
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A
market
is a place where buyers and sellers meet to exchange goods and services. For example, a pizza market is where pizza shops sell pizzas to hungry customers.
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In a market,
supply and demand are always changing
due to various factors. For example, if more people want to eat pizza, the demand for pizza will increase. If the cost of cheese goes up, the supply of pizza will decrease.
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When supply and demand change, they create either a
surplus
or a
shortage
in the market.
- A surplus is when there is more supply than demand.
-
A
shortage
is when there is more demand than supply.
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When there is a surplus or a shortage, the
price will adjust
until it
reaches a new equilibrium poin
t. This is where supply and demand are equal again.
- For example, if there is a surplus of pizza, the price will go down until more people buy pizza. If there is a shortage of pizza, the price will go up until less people buy pizza.
