What it is:
Market dynamics are the interaction of supply and demand as the basis for setting prices.
How it works (Example):
A fundamental concept of macroeconomics is the relationship between supply and demand as the principle forces behind the price of goods and services. Market dynamics consider how price patterns result from ongoing shifts in supply and demand for specific products. Pricing signals occur when a shift in supply or demand results in a commensurate shift in the other.
For example, suppose there is an increase in the demand for product A. This results in a price increase that encourages product A's manufacturers to increase output to meet the new level of demand. The result is in an increase in the supply of product A. Product A's market price should consequently return to its level prior to the initial rise in demand once the supply increase stabilizes demand.
Why it Matters:
Market dynamics are the result of collective market resources and preferences. For this reason, market dynamics are unaffected by the actions of any one individual or company. In fact, individuals act in response to market dynamics instead of causing them.