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Economics: Supply, Demand & Market Equilibrium
Question
What is demand?
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Answer
The quantity of a good or service that consumers are willing and able to buy at a given price over a given time period.
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Question
What is the law of demand?
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Answer
As price increases, quantity demanded falls (and vice versa) — an inverse relationship, assuming all other factors remain constant (ceteris paribus).
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Question
What causes a movement along the demand curve?
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Answer
A change in the price of the good itself — leading to a change in quantity demanded (not a shift of the whole curve).
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Question
What causes a shift in the demand curve?
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Answer
A change in any factor other than price: income, prices of substitutes/complements, tastes, population, expectations.
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Question
What is supply?
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Answer
The quantity of a good or service that producers are willing and able to offer for sale at a given price over a given time period.
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Question
What is the law of supply?
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Answer
As price increases, quantity supplied increases — a positive relationship. Higher prices make production more profitable.
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Question
What causes a shift in the supply curve?
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Answer
Changes in costs of production, technology, number of producers, government taxes/subsidies, or expectations of future prices.
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Question
What is market equilibrium?
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Answer
The price at which quantity demanded equals quantity supplied — the market "clears" with no surplus or shortage.
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Question
What happens if price is above equilibrium?
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Answer
A surplus (excess supply) — producers cannot sell all output, so price falls back toward equilibrium.
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Question
What happens if price is below equilibrium?
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Answer
A shortage (excess demand) — consumers cannot buy all they want, so price rises back toward equilibrium.
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