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"The more of something there is, the less valuable it is" is a common way I hear Supply & Demand explained, but it doesn’t make much intuitive sense to me. Why exactly does a unit of something become less valuable just because its overall supply increases? Keep in mind, I’m not asking about marginal utility, which assumes that someone has already obtained at least one unit and measures each subsequent evaluation for an additional unit of that thing (say, for example, bottles of water, in which that first bottle is valued highly, but each additional bottle is valued less). I’m asking why the price of any given unit would be low just because the overall supply is high. For instance, wouldn’t it be more profitable if I, as a company, sold the first batch of units for a high price, then slowly lowered the price for each subsequent batch, rather than price ALL units at a low price?

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Consider a market of apples.

There are 5 vendors, each with 10 apples - 50 apples in total = supply for apples.

Then there is 10 buyers, that each want 1 apple - 10 apples in total = demand for apples.

Note that demand < supply, which means that the buyers can pick the vendor with the lowest prices. The vendors knows this and therefore, for example vendor A, will decide to set his price for apples lower than the rest of the vendors, which in turn will make the buyers go to him. In response to this the other vendors will surely lower their prices aswell to be competitve with vendor A. As such the overall prices for apples on the market will fall for the simple reason that there were too many apples.

You could also try to imagine the opposite. Suppose the demand for diamonds are very high, every person in the world wants one - and can afford it (at the current price level). Now if supply is only at a level where 1/10 of people can get one. Then one person might try to guarantee that she will get one by proposing a price higher than everyone else in the world is paying. Obviously everyone else will do the same, which will push the price up until the richest 10% of the world will buy the diamonds. As such the prices of diamonds rose because there was too little supplied.

Does this answer your question? I assumed you was looking for a more intuitive answer or did you need it more technical?

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  • $\begingroup$ I understood everything until the diamonds example. Why is the consumer increasing the price of the item/diamond? Doesn’t the supplier raise prices? $\endgroup$ Sep 9, 2022 at 18:53
  • $\begingroup$ Maybe i explained it poorly, obviously the supplier raise prices, but they do it relative to the demand. Assume person 1 has 1 dollar, person 2 has 2 all the way to person 100. Assume there is only 10 diamonds supplied. If the price of diamonds were 2$ before then person 2-100 will all be able to pay for it and the producers will get a profit of 2*10=20. But why would the producers not just raise prices to 90, then only person 90-100 can afford it, but producers will earn 10*90=900. As such because of the many people demanding, the producers can set prices acordingly so that only the richest $\endgroup$
    – Casper97
    Sep 9, 2022 at 18:59

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