All societies are built on relationships – on connections and transactions between people exchanging goods, services, ideas, favours, sentiments, even goodwill. These relationships are completed over one or more transactions in which human needs are identified, met and fulfilled. In economic terms, this process is looked upon as a system of supply of goods and services produced and marketed to meet the demands of human needs and wants in a society.
For transactions and relationships to be completed satisfactorily, where both suppliers and consumers of goods and services reach a ‘happy’ state of affairs (an equilibrium), both supply and demand have to work in tandem. Excessive supplies would discourage people from paying a fair price to producers, and soon lead to reduction in production to meet demand without wastage. And, excessive demand would lead to shortage of goods and services, forcing people to pay much more for the goods and services they consume.
Unless there are interventions – such as trade monopolies, government regulations, situations caused by natural calamities or war – acting upon this system of supply and demand working in tandem, all transactions tend to be fair to both producers and consumers, leading to the state of equilibrium where supply and demand are met equally. Meaning, goods and services are supplied at the price people are willing to pay to consume.
Hence, price becomes the determining factor in a transaction. It is the amount of money people are willing to pay as consumers, or receive as producers, to conclude their transactions. If supply of goods and services is greater than the demand, the price falls to a level that can conclude the transaction satisfactorily. If the demand for goods and services increases vis-a-vis its supply, the price rises to a level that can conclude the transaction satisfactorily.