Why does supply equal demand? Problem if large increase of price, decreases demand only by a bit I have looked at my coursenotes and this thread here:Why does supply equal demand?, but they did not adress, why I do not understand the law of supply and demand.
The way I understand this law is the following: Supply is the amount of goods that can be produced,given the price of the good. Demand is how much of the good is demanded, given the price of the good. Supply is equal to demand.
The reasoning from my coursenotes is:If supply is higher than demand, sellers will decrease the price, so they can still sell everything they have. If Demand is higher than supply, there is no reason for the sellers to keep the price low, so they increase the price in order to get more profit.
I still dont understand one aspect. If we are in a situation, where a high increase of the price leads to only a small decrease of demand, the cost of potentially not selling a proportion of your goods is outweighed by the gain in profit from each good. So sellers do not have a reason to decrease the price.
I must be missing something, so I am very happy to see some explanation.
&quot;Sellers&quot; as a whole indeed do not have a reason to decrease the price under these conditions. But sellers don't decide together collusively, acting like a monopoly seller. Instead, each of the many individual sellers decides on its own. And each does have an incentive to lower its price, because by posting a lower price it can suddenly sell all of its individual supply (as long as this is below total market demand), which always increases profit. In other words, even if the market demand curve is very inelastic, the demand facing a single seller is highly elastic. It is therefore profit maximizing for an individual seller to slightly lower its price. If all others follow suit, the market price has decreased. This continues until equilibrium is reached.