Markets exist in all types of goods and services, and as economists, we are interested in how they work and what causes them to change.

The market price is determined by the interaction of market supply (producers) and market demand (consumers).

The point at which the quantity demanded equals the quantity supplied is the equilibrium point. This point states the price of the good (P1) and the market quantity (Q1).

Assuming that neither curve shifts, then market forces will maintain the equilibrium price. For instance, assume that the price rises above P1, then the firms will react by wishing to supply more (the price is higher, therefore, the revenue will be higher), at the same time consumers will demand less. The outcome is that there is excess supply. In other words, supply is greater than demand.

This situation results in producers having unsold stocks. In this case, producers will wish to sell stocks as they cost money to produce and maintain. Therefore, to sell them they will reduce the price of the good (contraction in supply). The lower price will encourages more demand for the good (extension in demand). This process continues until the supply and demand are again in equilibrium.

If the position of either the demand and / or supply curve shifts, then the equilibrium price and quantity will change. For instance, if the good becomes more fashionable, then the demand curve will shift from D1 to D2.

The new equilibrium price will be P2.