Markets and Business
Why Are Relative Prices Always Changing? A Crash Course in Supply and Demand
What It Is and How It Works
Economists love models—not the runway kind, but simple drawings that explain how the economy works. One of the most famous is the supply-and-demand model. It helps us understand how prices are set in a market and why they change.
Demand represents what people want to buy and depends on things like income, preferences, the price of related goods, what people expect for the future, and the price of that good. When prices go up, people usually buy less. When prices fall, they buy more. That’s why the demand curve goes downwards. However, the demand curve can shift when something besides price changes, like people earning more money or a new trend hitting TikTok.
Supply is about what companies want to sell. Their decisions are influenced by costs, technology, competition, expectations, and, again, the price at which they can sell their product. If a new machine makes producing shoes cheaper, companies might supply more, even at the same price. That’s why the supply curve goes upwards.
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The Market Dance: Finding the Sweet Spot
The place where the supply and demand curves cross is called the market equilibrium. That’s where buyers and sellers agree on a price. If prices are too high, people don’t buy, and sellers are left with unsold stock. If prices are too low, stores run out of goods. Markets tend to move toward this balance naturally over time. Obviously, this varies depending on the level of competition in the market.
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Why It Matters for Business and Beyond
This model may look simple, but it helps explain a lot: Why is your new favourite snack more expensive this month? Why do gas prices shoot up during a war or a refinery issue? Businesses use this model daily to set prices, manage stock, and predict how people might react to changes in cost.
Understanding supply and demand also helps explain broader trends. For instance, if people start preferring electric scooters over bikes, companies shift production, prices change, and a new equilibrium is formed.
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A Final Note
Supply and demand aren’t just classroom concepts - they help you decide whether to wait for that hoodie to go on sale or buy it now. They shape wages, rent, and the cost of groceries. It’s the invisible conversation between buyers and sellers that keeps markets moving.
And that’s why, even if you don’t plan on being an economist, understanding this basic model will help you make sense of the world around you.