The supply and demand model

The supply and demand model explains how the price of a good or service is determined by the relationship between how much of it producers want to sell (supply) and how much consumers want to buy (demand). When demand exceeds supply, prices tend to rise, encouraging more production and reducing demand. Conversely, when supply exceeds demand, prices usually fall, prompting producers to cut back and consumers to buy more. This interplay helps find a balance point, known as the equilibrium price, where the amount supplied matches the amount demanded, ensuring market stability.