What does the economic principle of supply and demand explain?

The principle of supply and demand explains the relationship between the prices of goods and the quantity of those goods that consumers are willing to purchase. When demand for a product increases while supply remains constant, the price of the product tends to rise. Conversely, if supply exceeds demand, prices typically fall. This dynamic interaction drives market behavior, influencing how resources are allocated, production decisions are made, and how consumer preferences shape the availability and pricing of goods in the economy. Understanding this principle is fundamental in economics as it illustrates how market equilibrium is established, where the quantity supplied meets the quantity demanded.