Supply and Demand is the main model of price determination used in economic theory, barring outside influence such as Government control. Demand being the quantity of a specific product a buyer is willing to purchase at a given price. Supply being the quantity of a product or service that the marketplace can or will offer. Therefore the more demand for a product, with limited supply, will drive it’s price higher, less demand for a product will lower it’s price to make it more enticing.
The market does have a way to balance itself. As the demand drives prices higher, suppliers will want to produce more of a product to maximize gains. As that product reaches a certain supply level, it’s price will level itself out.
For example; if 1000 people wanted a ABC but there is only 100 ABC available, then Supply and Demand drives the price of ABC higher due to it’s demand. But if there are 1000 ABC available and only 100 people wanted ABC, then it’s price would be driven lower to entice buyers.
Now, when there is a high demand for ABC and it’s priced high, the producers of ABC are more enticed to produce more ABC in order to maximize their profits. But if the Demand for ABC is low and the producers of ABC aren’t profitable, then the producers will limit their production of ABC, thereby creating less Supply to balance with the Demand. This Supply and Demand will find a balance, where producers will supply an amount that matches the demand from buyers, at a cost that is reasonable to the buyer and producer.
How does Supply and Demand play into stock prices?
Supply and Demand plays into the cost of a stock. When there is more demand but fewer sellers, the price goes up. When everyone wants to sell a stock, but there are few buyer, the price goes down.
Example; If buyers want ABC and start paying the Ask price or buying at market price instead of limit price, then the price of the stock will start going up. When there are very few buyers and no one is buying at the market price, sellers will start selling at the Bid price thereby lowering the price of a stock. There is a define amount of shares available for a company, the share float, but the supply is based on the sellers who are willing to sell their shares.