#economics

Why Do Prices Change?

Prices in a market do not stay the same forever—they change when there are shifts in either demand or supply. Here's how it works:

🔺 If demand increases: This means more people want to buy the product, maybe because it's trendy, incomes have gone up, or the population has increased. As more people try to buy the same product, the price will go up because sellers know people are willing to pay more.

🔻 If demand decreases: Fewer people are interested in buying the product. This could be because tastes have changed, a better substitute is available, or people now have less money to spend. Since fewer people want it, the price will go down to attract buyers.

🔺 If supply increases: When producers make more of the product—perhaps because of new technology or cheaper raw materials—the market has more goods. This bigger supply pushes the price down because products are easier to find.

🔻 If supply decreases: There is less of the product available, maybe because of natural disasters, strikes, or higher production costs. Since the product is harder to find, sellers can charge a higher price, and so the price goes up.

Market Equilibrium

The market always tries to find a balance between supply and demand. This balance is called the equilibrium price.

• If the price is too high, there will be too much supply and not enough demand. This leads to unsold goods.

• If the price is too low, there will be too much demand and not enough supply, causing a shortage.

• Prices adjust naturally over time to reach equilibrium, where supply equals demand.

Elasticity and Price Changes

Another important idea is price elasticity of demand (PED). This tells us how sensitive consumers are to price changes.

• If demand is elastic, it means a small price change causes a big change in how much people buy. For example, if the price of ice cream goes up a little, many people might stop buying it.

• If demand is inelastic, it means even if the price goes up or down, people still buy almost the same amount. For example, people still need petrol or salt, even if the price increases.

Real-Life Example

Imagine a new phone becomes popular on social media. Suddenly, many people want it, so the demand increases, and the price goes up. Later, the company builds more factories and produces more phones. Now the supply increases, so the price goes down again.