Numerous buyers and sellers who share the common influence on the market price. The equilibrium price, favorable to both buyer and seller, is normally charged at the point where the demand of the commodity is equal to its supply. Determination of price in this kind of a market structure can be explained using the laws of supply and demand.
There are four essential laws of demand and supply. The first law states that an increase in demand and constant supply leads to higher equilibrium price and quantity. Secondly, a decrease in demand and constant supply leads to a proportional reduction in price. The third law states that lower equilibrium price arises when the supply rises and the demand remains unchanged. Finally, when the supply decreases and the demand remains constant, the price increases and the quantity reduces. It is evident from these laws that an increase in demand obviously results into higher prices and increase in supply results into lower prices.
However, this is not the case for audio C.Ds since their prices fall despite an increase in their demand. This contradiction is due to the excess supply of the C.Ds in the market which brings about surplus at the existing price. The suppliers realize an increment in inventories at higher prices than the equilibrium thus forced to lower the price below the equilibrium point in sharp contrast to the laws of supply and demand.
Apart from excess supply, an increase in the severity of competition in the CD industry can also lead to lower prices. The sellers tend to reduce the price of their C.Ds notwithstanding an increase in demand with the intention of beating competitors. This phenomenon can be illustrated by the diagram showing the shift in demand curve from left to right.