How does supply and demand affect price in a market?

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Supply is the amount of a good or service that producers make available, and demand is the amount of that same good or service that consumers are willing to buy. In a market economy, supply and demand work in a fairly simple (at least in theory) relationship to set prices. The simplest way to look at this question is to remember that demand for most items is affected by price through an inverse relationship—the higher the price, the less consumers will demand in a pure market situation. On the other hand, the higher the price of a good, the more producers will want to supply. So in effect, producers have to lower their prices to the point where consumers are willing to buy it. When producers are supplying as much as people are willing to buy, prices have reached what is known as an equilibrium point, and become stable. So there is a direct relationship between supply, demand, and prices. In...

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