What Determines Prices: Supply and Demand

Basics of economics explained in layman's terms, more or less:

The price of a good is determined by supply (those who will provide this good to make money) and demand (those who will give money to obtain the good). Simply put, buyers will pay (and sellers will demand) more money per unit for scarce goods.

If supply exceeds demand at a given price, there were be surplus, and prices will fall as suppliers attempt to liquidate their stock.

If demanded exceeds supply at a given price, there will be a shortage, and prices will rise as buyers increase their bids to obtain stock.

In a perfect world, the price is set in the market place to an equilibrium point.

Supply may be affected by other factors: there is ultimately a limit to the amount of something that can be supplied to the market, in the macroeconomic sense (only so much grain in the world). However, in a microeconomic sense, supply is more flexible (if a storm makes grain scarce in one nation and the price rises, sellers will ship in grain from other markets to capitalize).

Demand may also be affected by other factors: a rise in income, a change in taste, etc.

Of importance: money is a commodity traded for other commodities: governments control the availability of money, which has an impact of a market in which all other goods are traded for money.

If the amount of money in the system increases, its value as opposed to other goods correspondingly decreases until equilibrium is restored. This will be explored in greater detail in the next chapter.