supply and demand

1. In classical economic theory , the relation between these two factors determines the price of a commodity . This relationship is thought to be the driving force in a free market . As demand for an item increases, prices rise. When manufacturers respond to the price increase by producing a larger supply of that item, this increases competition and drives the price down. Modern economic theory proposes that many other factors affect price, including government regulations, monopolies , and modern techniques of marketing and advertising.