Which economic principle describes the relationship between supply and demand?

The concept that illustrates the relationship between supply and demand is known as the law of supply and demand dynamics. This principle asserts that the price of a good or service is determined by the relationship between its availability (supply) and the desire of consumers to purchase it (demand). When demand increases while supply remains constant, prices tend to rise, and conversely, when supply exceeds demand, prices tend to fall. This dynamic interaction helps to establish market equilibrium, where the quantity supplied matches the quantity demanded at a particular price level.

Understanding this principle is crucial because it underpins many economic decisions made by businesses and consumers alike. Analyzing how changes in demand or supply affect prices allows stakeholders to make informed choices in various situations, from production to pricing strategies. This fundamental economic idea illustrates why markets behave the way they do and helps explain fluctuations in price and quantity in real-world scenarios.