Describe how the laws of supply and demand combine to dictate the price of a product

Question

What will be an ideal response?

Answer 1

The law of supply dictates that profit on a product will dictate its supply, in that a company will want to produce more of a product if it can make more profit on it. This would hypothetically lead to a company raising the price on its product, assuming the company thinks the consumers would still buy the product at a higher price. However, the law of demand dictates that consumer demand will decrease as the price of a product or service increases.
Ultimately, the producer is able to make a product for a certain price. Below this price, the producer would lose money on a transaction and may choose to stop production of the product. Above this price, the producer would make a profit and so might choose to increase production of the product. As the price of a good or service rises, the producer may maximize their profits by increasing the quantity produced, but increasing price will decrease demand and lower profits.
The concept of supply and demand effectively brings together the perspectives of the consumer and the producer to determine the price of a good or service. Above the price, fewer products would be sold, cutting into profits, and below the price, the producer will not want to meet the demand, thus decreasing supply and driving up the price.