How does the law of supply and demand affect prices?

how does the law of supply and demand operate

The law of supply and demand is an economic theory that explains how supply and demand are related to each other and how the relationship affects the price of goods and services. It's a basic economic principle that states that when there is an oversupply of a good or service, prices fall. When there is high demand, prices tend to rise.

There is an inverse relationship between the supply and prices of goods and services when demand is unchanged. If there is an increase in supply for goods and services while demand remains the same, prices tend to fall to a lower equilibrium price and a higher quantity of goods and services. If there is a decrease in supply for goods and services while demand remains the same, prices tend to rise to a higher equilibrium price and a lower quantity of goods and

services.

The same inverse relationship holds for the demand of goods and services. However, when demand increases and supply remains the same, the higher demand leads to a higher equilibrium price and vice versa.

Supply and demand rise and fall until an equilibrium price is reached. For example, suppose a luxury car company sets the price of its new car model at $200,000. While the demand of the luxury car may be high due to the company creating hype for the car, most consumers are not willing to spend $200,000 for a car. As a result, the sales of the new model then quickly falls, creating an oversupply and lack of demand for the car. In response, the company reduces the price of the car to $150,000 to balance the supply and the demand for the car to reach an equilibrium price.

Source: www.investopedia.com

Category: Bank

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