The Law of Supply and Demand

At the very onset of learning economics or business, the most fundamental and basic topic to be taught is supply and demand. This is so because it is the underlying force behind any market economy.

What are the laws of Supply and Demand ?

By definition, demand is the quantity of goods and services (commodities) that consumers in a market are willing and able to buy at a specified price and at a given time. Supply, on the other hand, is the total amount of goods and services (commodities) that producers in an economy are able to avail for purchase at a given price during a specific period of time. Both supply and demand have a relationship with price. The relationship demand has with price is called the demand relationship. It is based on the quantity demanded and price of a good or service. On the other hand, the relationship supply has with price is the supply relationship. It is based on the quantity supplied in relation to price.

Therefore, we can deduce that the price of a good or service at a given time is determined by supply and demand. Supply and demand are two powerful forces in a market. In fact, they are responsible for the allocation of resources in an economy. Their interaction is what determines the efficiency of the market.

With the above forethought, let’s now consider the law of supply and demand in an in-depth manner. This law basically explains, in theory, how the supply of a specific good or service and the demand for that specific good or service are related.

Based on this law, there are two factors that can affect price; namely the availability of the product or the desire by consumers to have the product (demand). If the product is in low supply, but the consumers have a high desire to have it, then the price will automatically shoot up. Conversely, when the supply is high but the consumers have no desire to have it, the price will automatically fall.

Thus, we can authoritatively conclude that the law of supply and demand posits that the effect that high supply of a product and low demand has on price is to lower the price whereas the effect that low supply and high demand has on price is to increase the price.

Law of Demand

Theoretically, when the price of a product is high ceteris paribus, many people will not have the desire to have it. Even if they have to, they would want it at smaller quantities largely due to other factors such as opportunity cost and the availability of alternatives. Therefore, any rational person would avoid consuming that commodity. Thus, this results in low quantity demanded. The figure below illustrates this. The relationship between demand and price is negative as denoted with the downward slope.

Law of Supply

When the price of a good or service is high, it gives more incentive to producers to produce more of it and suppliers to supply more of it. The figure below illustrates this.

The relationship that exists between the price of a product and quantity supplied is positive as denoted with the upward slope. The reason for this is that suppliers will earn more revenue when they supply more, and there is an increase in price ceteris paribus.

In the interaction of the forces of supply and demand, there is a point of intersection. This is what is called as the equilibrium point. At this point, the market is considered to be efficient. This is because the quantity of goods supplied is at par with the quantity of goods demanded. The price at this point is the price at which suppliers are willing to sell all that they have and consumers are willing to buy as much as they desire. This is at times referred to as the equilibrium price.

Another aspect to consider is the movements and shifts along the demand and supply curve. Any movement on the demand curve will be due to change in price and quantity demanded. In the same light, any movement in the supply curve will be due to change in quantity supplied in relation to price.

Shifts, on the other hand, will be due to change in quantity demanded or supplied by all other factors except price.

In conclusion, the law of demand and supply is an essential ideal that should be understood by all interested parties in the marketplace.