How are prices made?

What does «supply and demand» mean?

A flea market, a weekly market or even the economy of an entire country usually functions according to the principle of the «market economy»: there is a supply, so people offer something for sale. This can be goods, for example vegetables, but also services such as haircuts. And other people want these goods or services, which is called «demand».

What does that have to do with the prices?

Prices are formed through the interplay of supply and demand. Roughly speaking, the demanders, i.e. the customers, want to pay as little as possible and the suppliers want to earn as much as possible. They have to meet somewhere in the middle and find a price that both sides find acceptable.

At a flea market, where few buyers and sellers meet directly, it's a fairly simple matter: there's a bit of haggling and an agreement is reached - or not.

Two examples: Why do prices rise and fall?

In the market economy of an entire country, things are more complicated than at a flea market. In most cases, however, the prices here also have to do with supply and demand. Here are two examples of how you can roughly imagine this:

• Prices can rise when demand increases but supply remains the same. For example, when many people want to go on holiday by car in the summer and need petrol, petrol stations often increase the price to earn even more. This is because they know that they will still get rid of the petrol.

• Prices can fall when supply increases but demand remains the same, for example when apples are ripe in autumn and there are a lot of them. Supermarkets then often lower the price so that they can still sell the many apples.

Sounds really quite simple ...

... is often much more complicated: there are many other factors that play a role in the development of prices. For example, what else is going on in the world, what things are currently trending, how many different providers there are for a product or service and so on.