Law of supply and demand
The law of supply and demand states that prices in a free market economy will tend to rise or fall based on the relationship between the supply of goods and services and the demand for them.
People indicate how much they want something (demand) by the amount of money they are willing to pay for it. Milton Friedman said,
- There's a fundamental economic law which has never been contradicted: if you pay more for something, there will tend to be more of that something available. If the amount you're willing to pay for anything goes up, somehow or other somebody will supply more of that thing. Youtube video
What makes a market economy interesting is that the economic pressure of increased demand stimulates suppliers to increase their output of goods and services. Initially, this increased output results in proportionally higher sales at the current price. As demand is satisfied, however, price tends to fall. While buyers wish to pay as low a price as possible, sellers wish to charge as high a price as possible. When supply is stable, price quickly reaches an equilibrium where bids and offers match.
The results of all this are:
- more goods and services produced
- more profits for suppliers
- lower prices for buyers
Equilibrium Price - Where supply and demand intersect is the equilibrium price and quantity, analogous to an auction. It is the first plateau in microeconomics. The analytico-synthetic method has been used to arrive at it, and now one has some insight into previously opaque reality.