I've learned what the principle of supply and demand says, and would paraphrase it like this:
The price of a good is at equilibrium when supply and demand are equal.
Or with other words:
The price of a good is dictated by the principle of supply and demand when supply and demand are equal.
My question is:
How does the principle (or even law) of supply and demand work in practice? Which forces force the price to be at equilibrium?
That's what I came up with (a very raw model):
- The producer or seller of a product notices that the product sells better than before.
- From this he draws the conclusion that there is a bigger need for the product: consumers want to have it more urgently than before.
- That means, consumers will probably be willing to pay a higher price for it than the current one.
Now there are different cases:
The producer can produce as much of the good as he could sell. He does so and sells it for the old price (making people happy). Or he takes a higher price (because he can, but not too high).
The producer can not produce as much of the good as he could sell.
a) He doesn't want to grow, so he produces as much as he can and sells it for the old price ("first come first serve"). Or he takes a higher price (but not too high).
b) He grows (taking credits) and raises the price to compensate the interests to be paid. Or he raises the price even more (because he can, but not too high).
Which of these scenarios is mainly responsible for rising prices in case a good is demanded more strongly?
And what is responsible for rising prices of goods with no rise of demand? (Is this only a collateral effect?)