how does demand affect prices 
prices tend to increase during periods of high demand and fall when demand is low this is because consumers compete with one another to secure scarce goods effectively bidding the price higher note that this is even true if there is an official ceiling to price growth if the government attempts to cap prices it may create an informal black market with high prices the bottom linethe theory of demand usually associated with the economist adam smith represents one half of the theory of supply and demand that forms the organizing principle for market economies it states that prices rise for goods that are in demand and fall for goods that are not in demand these prices act as a market signal to producers telling them when to produce more or less of a given good 