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supply and demand

Contributor(s): Ivy Wigmore

The laws of supply and demand are the observed relationships between the amount of something that is available for purchase, the level of desire consumers have to buy it and the price.

As a rule, low supply and high demand in the market correlate with higher prices, with the corollary that high supply and low demand lead to lower prices. The interaction of supply and demand tend to lead to an equilibrium price (also known as a market-clearing price), which is the price at which a vendor can sell all the units it has and buyers can purchase all the units they desire.

Here’s an example of how that might work: A smartphone manufacturer releases a new model with features that it believes justifies a steep price increase over the previous version. However, the units do not sell as anticipated – demand is lower than supply. To sell off the surplus units, the manufacturer lowers the price. It may make additional cuts until the price is attractive enough to bring demand up to the point where all units are sold; on the other hand, if sales are brisk, the manufacturer may raise the price to some intermediate value.

This was last updated in August 2018

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