How Supply and Demand Set Prices
How prices are set
0:58 · 720p · With AI narration and captions. This sample was made with the same system as this service.
Narration (full text)
Click a time to play from that scene.
Supply and Demand
How is the price of something decided? The key is the balance between supply and demand.
Demand Slopes Down
The demand curve slopes down. That's because the lower the price, the more people want to buy.
Supply Slopes Up
The supply curve slopes up. That's because the higher the price, the more sellers want to sell.
Equilibrium Price
Where the two lines cross, the price and the quantity traded are set. This price is called the equilibrium price.
Too High: Surplus
If the price is above equilibrium, sellers offer more than buyers want, and goods go unsold. So the price falls.
Too Low: Shortage
If the price is too low, buyers want more than sellers offer, and there's a shortage. So the price rises.
If Demand Rises
When demand grows, say because something becomes popular, the demand curve shifts right and the equilibrium price rises.
Prices Move to Balance
Prices move toward the point where supply and demand balance. That's how prices are set.
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