This is a basic supply and demand graph. The red line represents manufacturer supply and the blue line represents consumer demand.
The black dot is where the price should be set. If the price of the item is set anywhere to the left of the blue line, it will sell faster with a lower profit and possibly sell out. If the price is set to the right of the blue line, it will sell slower at a higher profit, or not sell at all. The black dot should be placed according to where the supply and demand curves cross.
This is a very basic representation of supply and demand. Other more complicated analysis would include supply and demand curves rather than straight lines, and the varying arcs of the curves are determined by market conditions, consumer opinion, manufacturer production capacity, etc. Some curves are elastic (meaning they will bend and move), and some are not, meaning they’re pretty straight and narrow.
Leaving both lines at a constant 45 degree angle, let’s say that we decide to slide the entire blue line to the right to simulate an increase in demand. Perhaps there is a shortage of a competing product and suddenly everyone wants our product instead. What happens to the black dot? It climbs the supply curve and the price goes up. We should increase the price because, if you’ll recall, if the black dot is left of the blue line, it surely will sell, but we want the best price, so we should certainly move the price to where X Marks the Spot. Now, let’s bring the blue line back and this time, slide the supply line, the red line, to the right. What happens? The price slides down the demand line. If we don’t bring the price down, nobody will buy it because the dot will be stuck on the right side of the demand curve.
The value of your home, just like any other product, is determined by the price someone will pay for it. The price they’ll pay directly corresponds to the condition of these two lines. Lots of houses on the market, prices fall. Scare the consumer with inappropriate doom and gloom and you’ll artificially decrease demand, lowering prices. Eliminate supply, prices skyrocket, etc.
You see, they work together to help you determine what the best price for your home is. It is my job to increase demand through marketing. It is your job to consider competing supply and determine where that little black dot should be. X Marks the Spot.