Law Of Supply And Demand

Published Dec 31, 2022

Definition of Law of Supply and Demand

The law of supply and demand is an economic principle that states that when the demand for a product or service increases, the price of that product or service also increases, and vice versa. That means the price of a good or service is determined by the interaction between the supply of that good or service and the demand for it.

Example

To illustrate this, let’s look at the example of a popular video game. Let’s assume that the game is in high demand and the supply is limited. That means there are more people who want to buy the game than there are copies available. As a result, the price of the game increases. On the other hand, if the demand for the game decreases, the price will also decrease.

Why the Law of Supply and Demand Matters

The law of supply and demand is one of the most important economic principles. It is the basis for the functioning of a free market economy. It is also the basis for the pricing of goods and services. That means it is essential for businesses to understand the law of supply and demand in order to set prices that maximize their profits. In addition, the law of supply and demand is also important for governments, as it helps them to understand the economic conditions of their country and make informed decisions.