Supply and demand

A market is any place where buyers and sellers meet to trade products. The market price is the amount customers are charged for items and depends on demand and supply.

Demand is the amount of a product customers are prepared to buy at different prices. Supply is the amount of a product businesses are prepared to sell at different prices.

Supply and demand can drive successful sales of a new product

There are many different types of market. The goods market is where everyday products such as DVDs are traded. The commodities market is where raw materials such as wheat are traded.

Market prices change when supply and demand patterns change.

  • An increase in demand following a successful advertising campaign usually causes an increase in price.
  • An increase in supply when a new business opens usually causes a fall in price.

Changing market prices affect a firm's costs. When the price of commodities such as oil and electricity increases, a business finds its own costs of production rise. Higher costs are either:

  • Passed on to the consumer in the form of higher prices.
  • Absorbed by the firm. This leaves prices unchanged but means lower profit margins for the company.