Supply and demand: economic principles and market equilibrium

¶ … Supply and Demand Determines Market Prices

This paper will explain the meanings of the following terms: supply, demand, market price, equilibrium, and market clearing price. This paper will then go on to explain how supply and demand determines market prices.

A person or company who is selling a product(s) and/or service(s) has a "supply" of products or services. Consumers, the people who are going to purchase the product(s) or service(s), have a "demand," which is a need or want, of the products or services.

An exchange of goods or services will occur whenever consumers and sellers agree on a "price, which is how much something costs. The agreed upon price is call the equilibrium price" (Supply and demand par 1). It is named that because "equilibrium" is when supply equals demand. Another name for equilibrium price is "market clearing price" (par 1).

A market price is not fair to all of who are involved in the market place, because it does not guarantee total satisfaction on the part of both buyer and seller or all buyers and sellers. Satisfaction will depend on their individual competitive positions within the market. Buyers know they are competing with other consumers, so they know if a seller is offering to low a price, the consumer is going to have too much competition (par 3).

On the other side of the coin, sellers want to maximize their profits, but they know if they set the price too high, their competition will beat the price and win consumers. Therefore, there will be various price levels where individual buyers and sellers are satisfied and the sum total will create a market or equilibrium price (par 3).

Equilibrium prices will change when there is a change in supply or demand. When supply increases, but demand does not, consumers will only buy if the price is lowered. Likewise, an increase in demand will influence market price (par 4).

Changes in supply and demand can be short run or long run in nature. Weather usually affects prices in the short run. Luxury goods tend to also affect the prices in the short run, while necessities tend to have stable or long run demand curves. Technology and advanced agriculture have both greatly affected market prices. They have caused lower prices due to cutting production costs (par 7).

So, it is safe to conclude that the higher the supply is, the lower the price is going to be, usually, and the higher the demand of a product or service, the more it is going to cost.