<p>The “law of supply and demand” is a feature of economic models with supply and demand curves. These are usually mainstream equilibrium models. It is somewhat difficult to relate these models to real world behaviour. I am in a theoretical camp that is critical of such models; perhaps someone else can give a better account.</p>

<p>As for your questions about stock prices, you probably would need to look at the mechanics of stock trading. Investors post prices at which they are willing to buy or sell, and then others will transact at those prices. (In some cases, market makers are the ones posting the price.)</p>

<p>Those participants can change their posted prices whenever they want, typically in response to news. The prices can move without a single share trading hands. This can be interpreted as a shift in the supply or demand curve.</p>

<p>If someone has a big order to buy or sell, they can clear out the first set of posted prices, and transact against other orders. This will result in a price change. For example, assume there are orders to buy 100 shares at \$10 and \$5. An order to sell 200 shares would first clear the best bid (\$10) and then hit the next bid (\$5). In this way, big orders can change prices.</p>

<p>A longer version of this example.</p>

<ul>
<li>There are no existing orders for shares in a company.</li>
<li>Investor A puts in a bid to buy 100 shares for \$5. The best bid (highest bid) is now \$5.</li>
<li>Investor B puts in an order to buy 100 shares for \$10. The best bid is now \$10. The bid price solely as the result of the new order; there was no transaction that moved the price.</li>
<li>Investor C wants to sell, and puts in an order to sell 200 shares. The first 100 shares clears B’s bid at \$10, and the second 100 clears A’s bid at \$5. The prices at which transactions happened was the result of an order clearing out the existing order.</li>
</ul>

CC BY-SA 3.0
2017-12-21T10:34:05.947Z
Do you have any nice reference where I could find info about the mechanics of stock trading? Ok it is somewhat more clear now, but who are the "others" in this sentence: "others will transact at those prices"? How they have been chosen?
Worldsheep
CC BY-SA 3.0
2017-12-21T16:00:06.740Z
Others = any other investor. You call your broker, and you give an order to buy or sell that is executed on the exchange. It could be an individual, or an institutional investor, In the real world, there are complications that I have glossed over here (different order types). As for references, you should be able to find something with a web search. You will have decide what is most useful to you. However, just find something introductory, as otherwise you will get hit with complications that have nothing to do with your original question.
Brian Romanchuk
CC BY-SA 3.0
2017-12-22T07:47:27.000Z
I am still a bit lost, I'll check on the web and come back if I have more questions. It would be nice to find a simplified example.
Worldsheep
CC BY-SA 3.0
2017-12-22T13:45:35.933Z
I expanded the example.
Brian Romanchuk
CC BY-SA 3.0
2017-12-24T09:57:18.723Z
What I was missing was the process "get the most profitable bid" and then move the the "next most profitable" and so on. Is this the only mechanism changing prices or there is something else? Thanks!
Worldsheep
CC BY-SA 3.0
2017-12-25T17:07:51.927Z
You need to distinguish what you mean by “price”. There’s the price at which transactions occur, and the bid/ask prices that people are wlling to transact at. I see now that my changes to the example were not saved, as that may have cleared things up.
Brian Romanchuk
CC BY-SA 3.0
2017-12-26T19:17:13.727Z
What I meant by price was the market price (last transaction). Thanks for the useful example!
Worldsheep
CC BY-SA 3.0
2017-12-19T23:44:50.170Z
2017-12-25T17:15:39.297Z
2017-12-25T17:15:39.297Z
Brian Romanchuk
<p>This is a <strong>very</strong> basic question. I can understand that price of goods and stocks change follows the supply and demand law. On the other hand, I find it difficult to understand what happens in the real world.</p>

<p>If I want to buy a particular stock I can buy it at the daily price and I can sell it at the daily price. I can't choose to sell it at a higher price as I would do if I had the only orange in the world and 1 million people wanted that orange.</p>

<p>Who has the ability to start selling a specific stock at a different price? Who initiate the change in price if the demand goes down? Has anyone a practical simple example for me?</p>

CC BY-SA 3.0
2017-12-20T02:12:53.440Z
Pretty much anyone can place a "limit" order to buy/sell a stock at a specified price, if and when the market attains that price.  Or you can simply watch the market and wait for it to reach your target price before buying or selling.
Hot Licks
CC BY-SA 3.0
2017-12-20T14:46:28.190Z
Standard economics textbooks classify stock market as the closest thing to perfectly competitive market, the theoretical extreme. The "limit" orders are still executed at the daily market price.
london
CC BY-SA 3.0
2017-12-21T10:30:13.570Z
I don't see how the limit order changes the price of a stock.
Worldsheep
CC BY-SA 4.0
2019-06-05T13:03:11.140Z
Have a look at my question https://economics.stackexchange.com/questions/29660/the-law-of-supply-and-demand-how-does-it-work
Hans-Peter Stricker
<supply-and-demand><stock-market>
What lies behind supply and demand model?
Worldsheep
# What lies behind supply and demand model?

(Asked by: username_0 on 2017-12-19)

This is a **very** basic question. I can understand that price of goods and stocks change follows the supply and demand law. On the other hand, I find it difficult to understand what happens in the real world.

If I want to buy a particular stock I can buy it at the daily price and I can sell it at the daily price. I can't choose to sell it at a higher price as I would do if I had the only orange in the world and 1 million people wanted that orange.

Who has the ability to start selling a specific stock at a different price? Who initiate the change in price if the demand goes down? Has anyone a practical simple example for me?

**Tags:** supply-and-demand, stock-market

> **Comments:**
> **username_1**: Pretty much anyone can place a "limit" order to buy/sell a stock at a specified price, if and when the market attains that price.  Or you can simply watch the market and wait for it to reach your target price before buying or selling.  
> **username_2**: Standard economics textbooks classify stock market as the closest thing to perfectly competitive market, the theoretical extreme. The "limit" orders are still executed at the daily market price.  
> **username_0**: I don't see how the limit order changes the price of a stock.  
> **username_3**: Have a look at my question https://economics.stackexchange.com/questions/29660/the-law-of-supply-and-demand-how-does-it-work  

---

## 1 answers

### Answer by username_4 on 2017-12-19. Score: 4 | Accepted answer

The “law of supply and demand” is a feature of economic models with supply and demand curves. These are usually mainstream equilibrium models. It is somewhat difficult to relate these models to real world behaviour. I am in a theoretical camp that is critical of such models; perhaps someone else can give a better account.

As for your questions about stock prices, you probably would need to look at the mechanics of stock trading. Investors post prices at which they are willing to buy or sell, and then others will transact at those prices. (In some cases, market makers are the ones posting the price.)

Those participants can change their posted prices whenever they want, typically in response to news. The prices can move without a single share trading hands. This can be interpreted as a shift in the supply or demand curve.

If someone has a big order to buy or sell, they can clear out the first set of posted prices, and transact against other orders. This will result in a price change. For example, assume there are orders to buy 100 shares at \$10 and \$5. An order to sell 200 shares would first clear the best bid (\$10) and then hit the next bid (\$5). In this way, big orders can change prices.

A longer version of this example.

* There are no existing orders for shares in a company.
* Investor A puts in a bid to buy 100 shares for \$5. The best bid (highest bid) is now \$5.
* Investor B puts in an order to buy 100 shares for \$10. The best bid is now \$10. The bid price solely as the result of the new order; there was no transaction that moved the price.
* Investor C wants to sell, and puts in an order to sell 200 shares. The first 100 shares clears B’s bid at \$10, and the second 100 clears A’s bid at \$5. The prices at which transactions happened was the result of an order clearing out the existing order.

> **Comments:**
> **username_0**: Do you have any nice reference where I could find info about the mechanics of stock trading? Ok it is somewhat more clear now, but who are the "others" in this sentence: "others will transact at those prices"? How they have been chosen?  
> **username_4**: Others = any other investor. You call your broker, and you give an order to buy or sell that is executed on the exchange. It could be an individual, or an institutional investor, In the real world, there are complications that I have glossed over here (different order types). As for references, you should be able to find something with a web search. You will have decide what is most useful to you. However, just find something introductory, as otherwise you will get hit with complications that have nothing to do with your original question.  
> **username_0**: I am still a bit lost, I'll check on the web and come back if I have more questions. It would be nice to find a simplified example.  
> **username_4**: I expanded the example.  
> **username_0**: What I was missing was the process "get the most profitable bid" and then move the the "next most profitable" and so on. Is this the only mechanism changing prices or there is something else? Thanks!  
> **username_4**: You need to distinguish what you mean by “price”. There’s the price at which transactions occur, and the bid/ask prices that people are wlling to transact at. I see now that my changes to the example were not saved, as that may have cleared things up.  
> **username_0**: What I meant by price was the market price (last transaction). Thanks for the useful example!  

---

