What is the role of supply and demand in economics?

What is the role of supply and demand in economics?

Supply and demand are fundamental concepts that explain how prices are determined in a market. Supply refers to how much of a good or service is available, while demand refers to how much of it consumers want. When demand exceeds supply, prices tend to rise, and when supply exceeds demand, prices tend to fall.

Can you give me an example of how this works in real life?

Sure! Consider the housing market. If there are more people looking to buy homes than there are homes available, the demand is high, which can drive up prices. Conversely, if there are many homes for sale but few buyers, the supply is high, leading to lower prices.

What factors can affect supply and demand?

Several factors can influence supply and demand, including consumer preferences, income levels, the price of related goods, and external factors like natural disasters or government policies.

How do changes in supply and demand affect the economy?

Changes in supply and demand can lead to fluctuations in prices, which can impact consumer spending, business investment, and overall economic growth. For example, rising prices may lead to decreased consumer spending, which can slow down economic activity.