Supply and demand are what makes the market. Supply is how much the market is able to provide. Demand is how much a product or service is desired by buyers.

Demand comes from how much quantity buyers are willing to buy at a certain price.

Supply and Demand have key relationship. Demand relationship, price and quantity demanded relationship. Supply relationship, producers willing to supply at certain price.

Price affects supply and demand.

In this market economy, it rewards efficient use of resources.

The law of demand

All things being equal, the higher the price the lower the demand. Buyers are less likely to be able to afford the good so they will either save their money or spend their money on something else.

There is a negative relationship between price and quantity demanded.

The law of supply

The higher the price the higher quantity is supplied. If producers can get a high price, they will produce more allowing them to earn more profit. Time is a factor in supply. Producers cannot react fast enough to ramp up their production to meet increased demand or shutdown factories for a sharp fall in demand. It also depends on the type of demand, short term versus long term.

Example of the Supply and Demand Relationship

If a book is to be released and based on the publishers past sales history, they choose to price the book at $30 and print 1,000 copies. Any higher and the publisher would risk shrinking demand. If demand increase to 1,500 books the price, buyers would be willing to pay also rises. This allows the publisher to provide more supply.

If the publisher prints too much say 2,000, the leftover 500 will have to be marked down in price as the current demand is too little and more buyers exist who are willing to pay a lower cost. People who could not afford the original $30 price.

Equilibrium

If supply and demand are equal, the market is at equilibrium. The market is efficient as goods supplied by producers are equal to the good quantity demanded by buyers. This is the intersection between demand and supply curves. Equilibrium when both buyers and sellers are satisfied.

In the real world lots of outside forces, prevent equilibrium from occurring such as changes in the economy, world events, weather conditions, government actions and oil prices.