What is Supply and demand?
Supply and demand: The interaction that sets market prices.
Where Supply and demand fits
Supply and demand is part of Market Structures in Economics. Markets set prices through supply and demand. Structures run from perfect competition to monopoly, and externalities or public goods are where markets alone fall short.
Practical tip
Ask how many sellers exist and how easily new ones can enter.
Related terms
- Monopoly
- One seller controls the whole market.
- Oligopoly
- A few large firms dominate a market.
- Perfect competition
- Many sellers offering identical products, so none can set the price.
- Externality
- A cost or benefit that lands on people outside the deal.
- Public good
- A good everyone can use and nobody can be excluded from.
- Price floor
- A legal minimum price.
- Natural monopoly
- A market best served by one firm because of high costs.
- Market equilibrium
- The point where supply equals demand.
Formulas you will use with it
Test yourself
Which term means: “The interaction that sets market prices.”?
Oligopoly · Externality · Supply and demand
Answer: Supply and demand
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