I just wanted to know if price changes how much quantity is supplied or demanded then what creates the price in the first place?

If you say that price affects supply and demand and supply and demand affect price then this just sounds like circular logic to me.



This is indeed a bit confusing. Supply and demand functions depend on potential prices. That is, the agents think "if the price were a given level, what would I want to supply or demand?". So supply and demand depend on a whole range of (hypothetical) prices. However, the equilibrium price (which is a certain price and different from the range of potential prices) is that price where both supply and demand meet. In your example, the equilibrium is where the circular logic stops and finds a resting point, which is also why we refer to it as an equilibrium. This is a concept, which we borrowed from physics and is often used to mean a position where things stop changing/moving.

You are right to ask, however, how this whole process is initialized.

The rigorous way to think about this for economists, is to use what is called a "Walrasian Auctioneer".

You can imagine the process as such. An auctioneer calls out prices. Suppliers report how much they wish to supply, whereas consumers report how much they wish to demand. If these do not meet, the auctioneer calls out other prices. This goes on until demand meets supply and that's when the auctioneer stops.

Of course in reality, there is no walrasian auctioneer. Nevertheless, it is not hard to imagine that a new firm sets some price when it starts and then adjusts it depending on demand. Furthermore, depending on that new suppliers might enter, which changes supply and causes the price to adjust again. This goes on until a stable point is found, which we call the equilibrium.

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    $\begingroup$ You might want to add that the whole concept is very theoretical. In a perfect economy there is no arbitrage. But try finding a product without arbitrage ;) stock markets might be a good example of almost perfect price building at any single given point in time $\endgroup$ – DonQuiKong Nov 15 '17 at 15:22

It depends on the market.

In most markets - in particular, most retail markets - the supplier first sets the price, by offering their goods/service at an advertised price.

In other markets - in particular, many auctions - the purchasers between them first set the price.

In some markets - for example, some openly-traded financial instruments, and some betting exchanges - both suppliers and purchasers specify a bid stack, so both of them are directly involved in first setting the price.

Over time, suppliers and purchasers interact repeatedly to discover prices that converge on the equilibrium.


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