Explain the significance of demand and supply.

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Supply and demand are essential to understanding pricing in a market economy. In a market economy, the government does not play a major role in the economy. This is contrary to a command economy in which the government makes all economic decisions, including what goods will be produced, how much will be produced, how it will be distributed, and how much it will cost.

Supply refers to the amount of a certain good that is available. Demand refers to how much of that good people are willing to buy at a given price. Supply and demand work together to help determine the price of an item. If demand for an item is high, but there is a low supply, the price of the item will be high. If demand for an item is low, but the supply is high, the price will be low.

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