Prices are set by supply and demand

STEP 1The force to buy, the force to sell

Who sets the price? Neither the shop owner nor the customer can decide it alone. Let's start with the tug of war between the two forces.

Demand: the quantity people will buy at that price

Demand is the quantity people are willing to buy at a given price. If a bungeoppang (fish-shaped pastry) costs KRW 500, many people buy it, but at KRW 3,000 the number of buyers drops sharply. This property, that the quantity people want to buy falls as the price rises, is called the 'law of demand.' It is because when something gets more expensive, people buy less or switch to other snacks.

Supply: the quantity sellers will sell at that price

Supply is the quantity sellers are willing to sell at a given price. If bungeoppang sells at a high price, street vendors bake more, and new people start selling bungeoppang. Conversely, if the price is too low, it doesn't even cover the ingredients and they bake less. This property, that the quantity sellers want to sell rises as the price rises, is called the 'law of supply.'

Where the two forces meet: the equilibrium price

Let's put one neighborhood's bungeoppang market into a table with imaginary numbers.

This is an imaginary example to aid understanding.

At a price of KRW 500, buyers want 950 pieces but there are only 350 bungeoppang, so the line gets long. The vendor learns that it will still sell at a higher price. Conversely, at KRW 1,500 the bungeoppang is left over and goes cold, so the vendor lowers the price. Pushing and pulling like this, the market settles near KRW 1,000, where the quantity buyers want equals the quantity sellers want. This price is called the equilibrium price.

Price is a signal sent to everyone

A price rising does not simply mean that something has become more expensive. To sellers it is a signal that "making more will pay," and to buyers it is a signal to "use less or look for something else." Seeing this signal, producers expand their factories and consumers look for substitutes. That is why, when a price rises too far, over time supply grows and demand shrinks, creating a force that brings it back down.

The reason prices matter to stock investors is, as we saw in Lesson 2, that revenue = quantity sold × price. If the price of a product a company sells rises, revenue grows, and if the price of a raw material a company buys rises, costs grow. Telling which price is moving, and whether that price is one company's selling price or another's cost, is the first step in reading the earnings knob.

STEP 2When the curves move, the price changes

Turn the table from STEP 1 into a picture and you get two lines. Now let's push those lines ourselves and see where the price goes.

From table to picture: the demand curve and the supply curve

Plot the prices and quantities demanded from the STEP 1 table as points and connect them, and you get a line sloping down to the right. This is the demand curve. Connect the prices and quantities supplied and you get a supply curve sloping up to the right. The point where the two lines meet is the equilibrium price and the equilibrium quantity.

There is one thing you must be sure to distinguish here. When the price itself changes and so the quantity people want to buy changes, that is a movement along the line. By contrast, when the whole quantity people want to buy rises or falls for reasons unrelated to price, the line itself shifts sideways. Most of the real causes that change prices are such shifts of the line.

See it as a picture: push the lines yourself

Use the sliders to increase or decrease demand and supply. The dotted line is the starting state. If you use the buttons below to switch to a 'product whose supply reacts slowly', the price moves much more for the same change in demand.

Press 'Demand up' and both price and quantity rise. Press 'Supply up' and quantity rises but price falls. Then switch to the product whose supply reacts slowly and increase demand. Since factories can't be expanded quickly, the price absorbs most of the increased demand, and the price rises much more steeply.

When supply is slow, prices trace a cycle

Building a memory semiconductor factory usually takes several years and costs tens of trillions of won. So even if demand grows today, supply follows only long after. Because of this time gap, the price cannot stay quietly at equilibrium and instead traces a price cycle that rises too far and then falls too far. Press the stages of the circle below one by one.

STEP 3Reading the memory semiconductor cycle

Now let's find the cycle in real numbers. Semiconductors are the biggest export item of the Korean economy.

A cycle that went around twice in eight years

The charts below show Korea's annual semiconductor export value and the annual operating profit of SK Hynix, a leading memory semiconductor company. Use the buttons to switch between the two numbers.

Let's overlay the numbers on the cycle circle from STEP 2. 2018 was a boom with surging server demand (a price spike), and in 2019 supply grew and demand cooled, so exports fell by nearly 26%. Demand revived again in 2021 and the first half of 2022, but from the second half of 2022 memory demand fell and prices dropped sharply, so SK Hynix posted its first quarterly operating loss in 10 years in the fourth quarter of 2022. The company said it would cut 2023 investment by more than 50% (output and investment cuts), and its full-year 2023 operating loss reached KRW 7.7 trillion. Afterwards, as demand for high-performance memory for AI servers surged, 2024 exports hit a record $141.9 billion, and in 2025 they set a new record of $173.4 billion.

Inventory: the cycle's thermometer

A number often watched to gauge where a price cycle stands is inventory. A rise in goods piling up unsold in warehouses means that the quantity sellers want to sell already exceeds the quantity buyers want to buy. So when inventory builds up quickly, a price fall becomes more likely, and when inventory shrinks, a price rise becomes more likely. This is also why SK Hynix said in early 2023, with the industry cutting investment and production, that "inventory will peak within the first half." When output cuts reduce supply, the accumulated inventory gradually sells off, and once inventory hits bottom, prices are ready to rise again. When phrases like 'inventory depletion' or 'inventory burden' show up in earnings releases or industry news, think about which stage of the cycle circle it is.

Exports ±30%, earnings over ±100%

Comparing the two charts shows an important difference. Export value moved by tens of percent between the worst and best years, but operating profit moved several-fold, from a KRW 20 trillion profit down to the KRW 2 trillion range, and again from a KRW 7 trillion loss to a KRW 47 trillion profit. As we saw in the 'Common misconceptions' in STEP 2, the costs of factories and equipment stay almost the same while the price goes up and down, so earnings swing far more.

Rewriting with the formula from Lesson 1, memory prices are the biggest lever on a semiconductor company's earnings knob. Each time the price cycle goes around once, earnings (EPS) change by several-fold, so stock prices inevitably swing widely too.

In practice: reading price-cycle industries

In cyclical sectors, you have to read the PER you learned in Lesson 1 carefully. When earnings are at their peak, EPS is large so PER looks low, and when earnings are at the bottom or in loss, PER is high or can't be calculated at all. That is why, for these sectors, people often ask first "where are we in the price cycle now?" rather than "the PER is low, so it's cheap." Semiconductor price signals are covered in more depth in Lesson 31, and reading cycles by industry in Lesson 35.

These are hypothetical headlines to aid understanding. They are not a recommendation to buy or sell any particular stock.

It does not always move like the textbook. Even with the same 'output cut' news, if demand keeps falling, prices can fall further, and stock prices often move before the actual price change (you will learn this in Lesson 34).