Supply and Demand Explained

Steps

1. Understand demand: As prices decrease, more people are willing and able to buy a product, so demand increases. As prices increase, fewer people buy, so demand decreases.
2. Understand supply: As prices increase, producers are willing to make and sell more of a product because they can earn more profit. As prices decrease, producers make less because it's less profitable.
3. Find equilibrium: The market naturally moves toward an equilibrium price where the quantity suppliers want to sell equals the quantity consumers want to buy.
4. Recognize shifts: Changes in factors like consumer income, production costs, preferences, or number of buyers and sellers can shift the entire supply or demand curve, creating a new equilibrium price.

Worked example

Imagine a new smartphone is released at $800, but only a few people buy it (low demand, high price). The company lowers the price to $600, and more people purchase it. Meanwhile, if production costs increase, the company might reduce how many phones they make at that price (decreased supply). Eventually, the market settles at perhaps $650, where the number of phones produced matches the number people want to buy.

Remember

Supply and demand work together like a balance: when one side changes, price adjusts until the market reaches a new point where supply equals demand.