The term 'Supply and Demand' is included in the Economics edition of the Financial Dictionary. Get your copy on Amazon in Kindle, Paperback or Audio edition. Check for lowest price here...
Supply and Demand refers to a law that attempts to explain the interaction between the forces involving a resource or good’s demand and available supply. It is this law that determines how much of a given product will be supplied and demanded at a certain price. When supply is low and demand is high, price tends to go up, while a higher supply and lower demand leads to falling prices.
This is considered to be a foundational economic law. It impacts the overwhelming majority of economic principles in some way. Supply and demand vie with one another as the market pricing attempts to reach equilibrium. There are many factors impacting both demand and supply, which means that there is no single way that they can affect the prices of the underlying commodity or goods in question. It is this equilibrium price, or market clearing price, that determines the set price for which producers will be able to sell off all of the units they can produce and at which the buyers will be able purchase as much as they want.
It always helps to look at a concrete example when considering a highly complicated topic like this one. If a business rolls out a new product, it may choose to start with a higher price. The problem will be that only a few consumers will purchase it at these higher prices. Because the business has large warehouses stocked with the new product, they will reduce the price to move their inventory. Demand will rise apace, yet now the business’ supply diminishes. The company will then raise the price back part of the way to where it originally was now until it achieves the ideal price to balance out both consumer demands with its own available supplies of the product in question.
In the real world scenarios, there is rarely only one company producing a given good or resource though. This means that the supply will depend on a range of competing factors. Costs of production, capacity of production, and the quantity of direct competitors will all impact the amount of supply that the producers can prepare. There are other side factors which include weather, availability of sometimes scarce raw materials, and dependability of the various supply chains that also have an impact on available supplies ultimately.
Demand is a more straightforward concept. It often comes down to the straight up cost of a good and the quality which is produced. There will also be close substitutes which are available, price shifts, and advertising campaigns that all have an impact on the actual demand. When video game machine prices decrease, the games (on the system) demand may rise as a greater number of individuals purchase the game machine and demand related games to play.
This law of supply and demand applies to more than simply prices. It can also be utilized to effectively explain various forms of other economic activities. One of these is that when unemployment proves to be higher, the supply of available workers is elevated. Businesses will respond by reducing wages to match the supply of workers. At the same time, if unemployment is lower, the available supply of employees will also be lower. This leads to companies providing higher salaries in order to attract top employees to their firms. This also explains stock market prices. The laws of supply and demand will similarly aid in describing why a stock price rises or falls on any given trading day.