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The Tastes and Preferences of Consumers

 law of supply and demand is an economic theory that explains how supply and demand are related to each other and how that relationship affects the price of goods and services. It’s a fundamental economic principle that when supply exceeds demand for a good or service, prices fall. When demand exceeds supply, prices tend to rise.

There is an inverse relationship between the supply and prices of goods and services when demand is unchanged. If there is an increase in supply for goods and services while demand remains the same, prices tend to fall to a lower equilibrium price and a higher equilibrium quantity of goods and services. If there is a decrease in supply of goods and services while demand remains the same, prices tend to rise to a higher equilibrium price and a lower quantity of goods and services.

The same inverse relationship holds for the demand of goods and services. However, when demand increases and supply remains the same, the higher demand leads to a higher equilibrium price and vice versa.

Supply and demand rise and fall until an equilibrium price is reached. For example, suppose a luxury car company sets the price of its new car model at $200,000. While the initial demand may be high, due to the company hyping and creating buzz for the car, most consumers are not willing to spend $200,000 for an auto. As a result, the sales of the new model quickly fall, creating an oversupplyand driving down demand for the car. In response, the company reduces the price of the car to $150,000 to balance the supply and the demand for the car to ultimately reach an equilibrium price.