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How does supply and demand affect price in a market?

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Alec Cranford eNotes educator | Certified Educator

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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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meenakshidushyanth | Student
First let's be clear with the words 'supply' and 'demand'. Supply means a part of the stock that a producer brings to the market place with specific price which is available for the Customer. While demand means the quantity of product the customers are willing to buy at specific price over a period of time. The supply should meet the demand, then the market is said to be at equilibrium. Now let's see how supply and demand effects the market. For example let's consider there is an huge demand for a sewing machine of particular company, if supply meets the demand that is both are at equilibrium then everything goes well with an specific price fixed by the seller for the product but if the supplier can't bring the product when customers needs it i.e; if goods are not enough to meet the demand then eventually the price increases for the product. The reverse of this may also occur, if demand is less and supply is high then the price of the product decreases. With the interaction from customers and producers the rate of supply and demand is decided. The market stays at equilibrium when supply and demand are same, also the price remains at equilibrium. But if supply exceeds the demand or there is an excess amount of product in the market that has to be sold then the price decreases. This may happen vice verse also, with increase in demand if the supply fails to meet demand then the price increases. We may conclude that both supply and demand are the backbone of the market. Also they are the deciding factor of the price for a product.