When you have finished this page, go to the Supply and Demand Quiz.
You may wonder why the prices of goods go up and down so often. One of the reasons is the law of supply and demand. Supply refers to how many of a certain good or service are available for people to purchase. Demand means how many people wish to buy that good or service.
How does this work? Let’s say that a brand-new, super powerful video game is about to come out. The game makers must decide how many of the games to make so they are not stuck with too many. They then have to decide how much to charge for the game – its price. They would need to charge enough for the game to cover the costs of creating the game, advertising the game, shipping the game to stores. Since they also wish to make a profit on the game, they will also want to figure that cost as well. If the price of the game is too high, however, people may not be able to afford it or decide it is not worth the price and there will be too many or an oversupply. If the price is too low, costs will not be covered and little profit will be made even though the game may sell very well. The company would lose money and may even have to close. The people who invest money in the company would not want to give the company money anymore to make more products because they would not get a good share of the profits. Usually as prices rise, the supply or amount of a product increases and as prices fall, the supply decreases as more people can afford the product.
If the product is a truly excellent one, there will probably be high demand. Also if it is well advertised, more people will know about the product and be apt to want it. If the product is not well advertised or is not a good product, people will not want it and the demand will be low and the supply greater. In the case of the video game, if a better game came on the market later with superior technology, the demand for the current game would probably drop and thus the price would have to drop to sell it.
Other factors that affect sales of an item are if the product is available, how good the customer service is, the appearance of the store, how the items are displayed – even what the parking is like for a store or the colors of the boxes the product is in.
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