What Is Supply and Demand?

What Is Supply and Demand?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

Supply and demand is a fundamental economic concept that helps to determine the value and price of a particular good or service in the market. In short, supply is the amount of a particular product that sellers are willing to sell at a certain price, and demand is the amount that buyers are willing to buy at that price. If the demand is higher than the supply, the price tends to go up, and if the supply is higher than the demand, the price tends to go down.

Related Questions

1. What happens when supply is greater than demand?

When supply exceeds demand, also known as a surplus, it often leads to lower prices. This is primarily because sellers strive to unload excess items, which they can only do effectively by reducing the price to attract more buyers.

2. What happens when demand is greater than supply?

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When demand outstrips supply, it often leads to higher prices. This is what’s known as scarcity, where a product or service is in high demand but limited in supply. Sellers can potentially raise the price, knowing that buyers are willing to pay more to secure the limited stock available.

3. How does supply and demand balance in the market?

The balance between supply and demand is found at the equilibrium point – the price at which the quantity of goods supplied matches the quantity demanded. At this point, both buyers and sellers are satisfied, contributing to market stability.

4. How does supply and demand impact consumers?

Supply and demand directly affect consumers. When the demand for a product or service is high, but the supply is low, prices increase which may make the product unaffordable for some consumers. Conversely, when supply is high and demand is low, prices may decrease, making the product more accessible for consumers.

5. Can supply and demand influence the economy?

Yes, supply and demand have a prominent role in shaping the economy. They directly affect pricing, availability of goods and services, production levels, employment rates, and overall economic growth. As such, understanding supply and demand dynamics is key for economic policymakers and businesses alike.