What economic principle states that prices vary based on supply and demand?

The economic principle that states prices vary based on supply and demand is the concept of supply and demand itself. This fundamental theory explains that the price of a good or service is determined by the relationship between its availability (supply) and the desire of consumers to purchase it (demand). When demand for a product exceeds its supply, prices tend to rise, as consumers are willing to pay more to secure the limited goods. Conversely, when the supply of a product surpasses demand, prices typically fall.

This principle is vital for understanding how markets operate, influencing everything from consumer behavior to pricing strategies for businesses. Recognizing the dynamics of supply and demand helps individuals and businesses predict changes in market conditions, adjust their production, and understand consumer preferences in a variety of economic contexts.