When discussing the impact of demand and supply on prices, one must first understand what these terms mean. In Economics, demand is the quantity of a good or service that consumers are willing to purchase at a given price. The Law of Demand states that, all else being equal, as the price of a good or service increases, the quantity demanded decreases. The converse is also true; as the price of a good or service decreases, the quantity demanded increases.
The term supply refers to the quantity of a good or service that producers are willing and able to sell at a given price. The Law of Supply states that, all else being equal, as the price of a good or service increases, the quantity supplied increases. The converse is also true; as the price of a good or service decreases, the quantity supplied decreases.
In a perfectly competitive market, demand and supply determine the prices of goods and services. When demand for a good or service exceeds the available supply, prices will increase until the market reaches equilibrium (i.e., demand equals supply). Similarly, when the available supply exceeds demand, prices will decrease until equilibrium is reached.
The same principles of demand and supply apply to the foreign exchange market. The forex market is a global decentralized market for the trading of currencies. This means that there is no central marketplace where transactions take place. Instead, transactions are conducted between two parties directly, over-the-counter (OTC).
