You may notice that the price of items you purchase changes from time to time. This is usually due to a direct correlation between price and demand. From an economic standpoint, an ideal marketplace is one in which the supply of goods is equal to the quantity demanded. In everyday life, however, this does not always happen.
Demand
Demand is the driving force of most industries and economies. When a good or service is considered desirable, because of aesthetics, necessity or quality of design, the demand for it is likely to increase. In order to produce more of the demanded good or service, suppliers increase its cost. This is one of the reasons prices of something you buy this week may be higher next week. Concert ticket prices, electronics and luxury items often experience swings in price due to demand.
Surplus
When the demand for an item increases significantly, a surplus may result due to increased production. This surplus means there are more goods or services available than there are willing buyers available. Likewise, if prices are too high, suppliers receive excess profits and an opportunity for supplier competition arises in the market. To correct this imbalance, suppliers lower their prices. As prices fall, the amount of goods demanded corrects and eventually again meets demand.
Inelasticity
In most cases, when the demand for a good or service increases, the price increases accordingly. Goods that are considered a necessity by society, however, do not necessarily experience a chance in price. These goods are considered inelastic, and they may essentially remain the same price regardless of demand. The price of medicine is often considered inelastic, because it does not have a significant response to increased demand.
Equilibrium
Equilibrium occurs when a buyer and seller agree on a price, thereby signaling that demand and supply are equal. An increase in the demand for a product, followed by a surplus and a subsequent fall in price, results in a new market equilibrium. This new point at which demand meets supply may be higher or lower than the previous equilibrium. If demand changes again, the process repeats itself and a new equilibrium is eventually reached.
