The market balance is fragile and influenced by many factors. There is the fundamental economic law of supply and demand, which explains how these two economic quantities affect each other and how they shape the prices of goods and services. According to the law, prices fall when supply exceeds demand and rise when demand exceeds supply (Kramer, 2019). The situation when supply and demand are the same is called market equilibrium. Demand and supply are constantly changing until the balance is reached. Depending on these constant fluctuations, price changes also occur.
Several factors influence the changing relationships between supply and demand. The substitutional effect says that people will buy less expensive products. Therefore, the cheaper the products are, the more will be sold, and vice versa. Income effects imply that if the price is lowered, people can afford more products, which works in the other way too. Finally, there is a law of diminishing marginal utility, which is basically decreasing additional satisfaction. The law says that the more products a person purchases, the less additional satisfaction he or she gets (365 Careers, 2019). Thus, price changes are driven by fluctuations in supply and demand, which, in turn, are influenced by buyers and producers.
Not only the law of supply and demand has an impact on the economy. Government regulation exists in all areas, but it is especially extensive in the economy, affecting prices. First of all, increased regulations promote inflation, influencing households, especially those with low income. There is also an increase in price volatility, causing this type of families to spend a significantly larger share of their income on expensive, highly regulated goods and services (Chambers, 2019). Thus, most often, government regulations have a negative impact on the prices of goods for consumers.
References
365 Career. (2019). The laws of demand and supply [Video]. YouTube. Web.
Chambers, D., Collins, C. A., & Krause, A. (2019). How do federal regulations affect consumer prices? An analysis of the regressive effects of regulation. Public Choice, 180, 57 – 90.
Kramer, L. (2019). How does the law of supply and demand affect prices? Investopedia. Web.