Now that we know the laws of supply and demand, let's turn to an example to
show how supply and demand affect price.
Imagine that a special edition CD of your favorite band is released for $20.
Because the record company's previous analysis showed that consumers will not
demand CDs at a price higher than $20, only ten CDs were released because
the opportunity cost is too high for suppliers to produce more. If, however, the ten
CDs are demanded by 20 people, the price will subsequently rise because,nvestopedia.com – the resource for investing and personal finance education.
according to the demand relationship, as demand increases, so does the price.
Consequently, the rise in price should prompt more CDs to be supplied as the
supply relationship shows that the higher the price, the higher the quantity supplied.
If, however, there are 30 CDs produced and demand is still at 20, the price will
not be pushed up because the supply more than accommodates demand. In fact
after the 20 consumers have been satisfied with their CD purchases, the price of
the justifyover CDs may drop as CD producers attempt to sell the remaining ten
CDs. The lower price will then make the CD more available to people who had
previously decided that the opportunity cost of buying the CD at $20 was too high.
