What is the primary purpose of supply and demand in economics?

The primary purpose of supply and demand in economics is to determine market prices. The interaction between supply and demand establishes the price at which goods and services are sold in a market. When demand for a product increases and supply remains constant, prices tend to rise as consumers compete to purchase the limited available quantity. Conversely, if supply exceeds demand, prices typically fall as sellers try to attract buyers.

This fundamental principle underlies many economic theories and models, illustrating how prices are not arbitrary but rather a reflection of market conditions. The balance between supply and demand is essential for understanding how resources are allocated in an economy, as it signals to producers what to supply and how much of it, based on consumer interest and willingness to pay. Thus, understanding this dynamic is crucial for any analysis of market behavior and economic performance.