Law of Supply and Demand

Law of Supply and Demand

Law of Supply and Demand Jonathan Poland

The Law of Supply and Demand is one of the fundamental principles of economics. It states that the quantity of a good or service that a seller is willing to supply is directly related to the price at which they can sell it, while the quantity of a good or service that a buyer is willing to purchase is directly related to the price at which they can buy it. In other words, the higher the price, the more willing sellers are to supply a good or service, and the lower the price, the less willing they are to supply it. Similarly, the higher the price, the less willing buyers are to purchase a good or service, and the lower the price, the more willing they are to purchase it.

There are several factors that can influence the supply and demand for a good or service. Some of these include the availability of resources, the cost of production, and the overall level of economic activity. For example, if there is a shortage of a particular resource, it may become more expensive to produce a good or service, which could lead to a decrease in the supply of that good or service. On the other hand, if there is an increase in the cost of production, it may become less profitable for sellers to produce a good or service, which could also lead to a decrease in supply.

The interaction between supply and demand determines the market price of a good or service. When the supply of a good or service is greater than the demand, the market price will tend to be lower, as sellers will be willing to lower their prices in order to attract buyers. Conversely, when the demand for a good or service is greater than the supply, the market price will tend to be higher, as buyers are willing to pay more in order to obtain the good or service.

The Law of Supply and Demand plays a central role in determining the allocation of resources in a market economy. By setting prices and determining the quantities of goods and services produced and consumed, it helps to ensure that resources are used efficiently and that the needs and preferences of consumers are met. The following are illustrative examples of the implications of this fundamental economic principle.

Price Decreases Demand
The basic direction of a demand curve points down as people generally demand less of a good when it is more expensive.

Price Increases Supply
The basic direction of a supply curve points up as market participants will find ways to increase supply as a higher price is offered.

Demand Increases Supply
More demand increases the price, creating more supply. For example, a television show talks about the health benefits of a particular fruit. Other media outlets pick up on the idea and a large number of people start buying the fruit. Demand increases dramatically, driving up prices. Farmers see these prices and begin to allocate land, labor and capital to producing the fruit. In the following years, the supply of the fruit doubles.

Supply Decreases Price
Increased supply results in a lower price. For example, if there were 10,000 computer science graduates each year they might each have multiple job offers and be in a good position to negotiate a high salary. However, if the number of computer science graduates suddenly jumped to 1 million, salaries would drop as competition for each position would become more intense.

Supply Increases Demand … Sometimes
In many cases, more supply ends up creating more demand by pushing prices down. This isn’t always true because if you’re supplying something people don’t want it will not impact demand. However, a product with healthy demand will generally see an increase in demand when supply increases. For example, if the supply of apples doubled next year prices would tumble and some consumers would buy more apples based on price comparisons with other foods.

Business Cycles
The law of supply and demand explains the cycles of boom and bust experienced by many industries. A rising price causes capital investment to increase supply. Depending on the industry, it can take months or years for the new supply to show up. When supply does finally increase it causes prices to decline. The declining prices cause supply to drop as firms reallocate resources or exit the industry. The price begins to increase again due to less supply and the cycle repeats.

Inflation
Extremely high inflation can cause the laws of supply and demand to break down. For example, inflation causes people to buy goods more quickly because money loses its value. This is a situation whereby higher prices may actually stimulate more demand as it simply causes people to fear the prices of tomorrow.

Giffen Goods
Giffen goods are a category of goods that people buy more as the price rises. This is another exception to the laws of supply and demand. For example, in some nations rice may be a giffen good. When the price of rice increases, people may buy less meat as they need to conserve their food budget. The decline in meat consumption results in more rice consumption as people need to replace the calories.

Learn More
Design Strategy Jonathan Poland

Design Strategy

A design strategy is a high-level plan that guides the overall approach to a design. It outlines the goals, principles,…

Team Management Jonathan Poland

Team Management

Team management involves directing and controlling an organizational unit. Some common team management functions include setting goals and objectives, assigning…

Overthinking Jonathan Poland

Overthinking

Overthinking, also known as rumination, is a thought process that involves excessive and prolonged contemplation of a problem or situation.…

Relational Capital Jonathan Poland

Relational Capital

Relational capital refers to the value that a company derives from its relationships with stakeholders, such as customers, employees, suppliers,…

Everyday Low Price Jonathan Poland

Everyday Low Price

Everyday low price, commonly abbreviated as EDLP, is a pricing strategy in which a retailer offers its products at a…

Taxes Jonathan Poland

Taxes

Taxes are mandatory financial contributions that are levied by a government on individuals, businesses, and other organizations. The money collected…

Advantages vs Disadvantages of Technology Jonathan Poland

Advantages vs Disadvantages of Technology

Technology has brought many advantages to modern society, and has greatly improved the way we live and work. Some of…

Right to Repair Jonathan Poland

Right to Repair

The right to repair is the idea that consumers should have the right to repair their own electronic devices and…

Sustainable Design Jonathan Poland

Sustainable Design

Designing for sustainability involves creating products, services, and processes that minimize environmental impact and enhance quality of life for the…

Latest Thinking

Qualified Small Business Stock (QSBS) Jonathan Poland

Qualified Small Business Stock (QSBS)

Qualified Small Business Stock (QSBS) refers to a special classification of stock in the United States that offers significant tax…

Barrick Gold Jonathan Poland

Barrick Gold

Barrick Gold Corporation (NYSE: GOLD) is a significant player in the global economy, particularly within the gold mining industry. Its…

Newmont Corporation Jonathan Poland

Newmont Corporation

Newmont Corporation (NYSE: NEM), being the world’s largest gold mining corporation, with extensive operations in mining and production of not…

Gold is Money Jonathan Poland

Gold is Money

Overview The history of gold as money spans thousands of years and has played a pivotal role in the economic…

What is Leadership? Jonathan Poland

What is Leadership?

In the modern business world, where rapid changes, technological advancements, and global challenges are the norm, effective leadership is more…

Product Durability Jonathan Poland

Product Durability

A durable product, often referred to as a durable good, is a product that does not quickly wear out or,…

Durable Competitive Advantage Jonathan Poland

Durable Competitive Advantage

The most important aspect of durability is market fit. Unique super simple products or services that does change much if…

Praxeology Jonathan Poland

Praxeology

Praxeology is the study of human action, particularly as it pertains to decision-making and the pursuit of goals. The term…

Business Models Jonathan Poland

Business Models

Business models define how a company creates, delivers, and captures value. There are numerous business models, each tailored to specific…