For many consumers, price seems to change with a one-way ratchet set to &quot;up.&quot; However, economists argue that price is actually set by market forces, balancing supply and demand in order to optimize output with minimal waste. Although it may seem that prices are set randomly, economists explain that price determination is a rational process calculated in a straightforward manner.
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Producers want to sell as many units as possible at as high a price as possible. Selling a $5 product for $100 is a great deal for any entrepreneur. However, the lower the final price, the fewer units of product or service a provider will put into circulation. Thus, supply, or the amount of product or service offered, increases as the price increases.
Customers will generally demand more of a product at a lower cost. For example, there are more people who would be willing to pay 50 cents for a big-screen TV than those who would pay $500, and fewer still who would be willing to pay $5,000. In this way, it can be said that the demand for a product falls as the price increases.
Investopedia, an investment-research company, notes that &quot;the law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will demand that good. In other words, the higher the price, the lower the quantity demanded.&quot;
Related Reading: What Does Equilibrium Price Mean?
The price of an item is the point where the supply at a given price intersects the demand at a specific price. If it costs $1 to create a widget, then a widget manufacturer may be willing to supply 100,000 widgets if customers pay $10 for each, 50,000 for $5, 10,000 for $1, and 1,000 for $1. Customers, however, would buy 100,000 at $1, and only 1,000 at $10. By determining how many units...