What does the law of supply and demand explain?

The law of supply and demand describes the relationship between the supply of a good or service and the demand for it. It asserts that the price of an item will adjust to bring the quantity supplied and the quantity demanded into balance. When demand for a good increases, prices typically rise if supply remains constant, as producers can charge more. Conversely, if supply increases without a corresponding increase in demand, prices tend to fall to encourage sales. This fundamental principle helps explain how prices are determined in a free market and how they fluctuate based on various economic conditions. Understanding this interaction is essential for grasping broader economic concepts and market behaviors.