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 effect, in a market economy—where producers are driven by the profit motive—prices are dictated by the forces of supply and demand. According to market economic theory, this is actually the best way to determine prices and to provide goods and services to consumers.

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Supply and demand determine price in the marketplace. In an ideal situation, supply will exactly match demand. In this scenario, there is no surplus or shortage of a product, allowing profits to be maximized. If supply increases and demand doesn’t, prices will drop because there will be a surplus of the product. Lowering prices will help end the surplus. If demand increases and supply remains the same, then prices will rise because there isn’t enough of the product available. When a shortage of a product exists, prices will rise.

In late summer, car prices tend to drop because car dealers want to sell the current year's model of cars to make way for the next year’s model of cars. Since the supply of cars increases, the prices drop to encourage people to buy cars. In late August, the prices of Fall clothing tend to be higher since the demand for Fall clothing increases. However, in winter when the demand drops, prices of Fall clothing will also drop.

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Supply and demand affect prices in the market by interacting with one another.  That is, the supply and demand together determine what the price will be.  When supply or demand changes, the price will change as well.

The two have opposite effects on prices.  The relationship between supply and prices is, all other things being equal, inverse.  When supply goes up, price goes down.  The relationship between demand and prices is, all other things being equal, direct.  When demand goes up, prices go up.

In a free market, supply and demand interact to determine the prices of goods and services.

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