Does price impact supply and demand, or is it supply and demand that determines price?

Expert Solution

Price of a commodity is the main factor that affects its demand and supply. If the price of a commodity falls its demand falls whereas with an increase in price the producer would want to increase the supply in the market to earn more and more revenues. The law of demand states other things remaining constant there is inverse relationship between price and quantity demanded. The law of supply states other things remaining constant there is direct relation between the price and quantity supplied of a commodity.

The interaction of demand and supply curves determine the equilibrium price or the market price of a commodity. In other words the price at which the quantity demanded equals the quantity supplied is the equilibrium price. So we can say that market price is determined by the interaction of market forces of demand and supply.

The other aspect we can take into account is that if the demand/supply of a commodity increases/decreases due to change in factors other than price, the demand or the supply curve shifts outward or inward whereas the market price will remain unaffectd.

Rahul Sunny answered 1 year ago

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