The Law of Supply and Demand

For a market economy to function, producers must supply the goods that consumers want. This is known as the law of supply and demand. “Supply” refers to the amount of goods a market can produce, while “demand” refers to the amount of goods consumers are willing to buy. Together, these two powerful market forces form the main principle that underlies all economic theory.

The law of supply and demand explains how prices are set for the sale of goods. The process starts with consumers demanding goods. When demand is high, producers can charge high prices for goods. The promise of earning large profits from high prices inspires producers to manufacture goods to meet the demand. However, the law of demand states that if prices are too high, only a few consumers will purchase the goods and demand will go unmet. To fully meet demand, producers must charge a price that will result in the required amount of sales while still generating profits for themselves.

For example, assume that a cell phone manufacturing company perceives demand for new cell phones. The company invests in market research to produce the exact cell phone that consumers want. The company then produces 5,000 units and puts them up for sale at $300 each. Consumers who find the phone to be valuable pay the full $300, and half of the units are soon sold.

Because of the high price, however, sales gradually begin to drop off. Many consumers still want the phone, but are unwilling or unable to pay $300 for one. Because the cell phone company loses money on unsold products, it reduces the phone’s price to $250 in hopes of increasing sales. Consumers begin buying again. The process continues until a price is reached that will both meet demand and maximize the company’s profits. That price is known as the “market-clearing price.”

When supply becomes balanced with demand, the market is said to have reached equilibrium. At equilibrium, resources are used at their maximum efficiency. The study of economics is largely a study in how market economies can best achieve equilibrium, which is why economists spend a great deal of time analyzing the relationship between supply and demand.

The law of supply and demand explains why people behave in certain ways within a market economy, and can even be used to predict behavior and, thereby, economic outcomes. Manufacturers who want the highest price possible for their products, utilize inventory management protocols and invest in advertising to encourage consumers to buy. Consumers who value a low price over the quality or popularity of a product shop at outlets and discount stores, while those who favor popularity over price purchase goods from retail stores at the height of the market.

The law of supply and demand is not just limited to the sale of products, however. It can be used to explain almost any economic phenomenon, such as a rise or drop in employment, increased or decreased enrollment in colleges, the expansion or shrinking of government programs, and increases or reductions in available resources. Therefore, the law of supply and demand is not only vital to economic theory, it is the foundation of economics itself.

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{ 24 comments… read them below or add one }

Tsigbe November 9, 2011 at 8:52 am

LIKE IT

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argiejebone November 28, 2013 at 10:21 pm

me too

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iwunze mercy January 13, 2012 at 10:20 am

The price affects the demand, while the demand affects the supply…

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Wisdom Golden January 24, 2012 at 6:51 am

Price is the middle chain between demand and supply. The exchange of goods and services depends on THE PRICE. But if I may ask, who really determines the price of the market? The producer who supplies or the consumer who demands or the state of economy. Because price is not usually in a clear market. I mean at equilibrium.

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Mohammed s.i September 6, 2012 at 2:21 am

I salute economic!

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motunrayo bello April 2, 2012 at 8:10 am

Quanlity affect price while price affect supply and suppy affect demand in a market in a situation were by supply and demand are equal it result to the process of equilibrium

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motunrayo bello April 2, 2012 at 9:04 am

Price affect quantity while quanlity affect price and price affect demand

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Musa Alhassan kwadadai April 16, 2012 at 6:40 am

I like economics

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Sowunmi jamiu June 23, 2012 at 3:52 am

Since the law of demand and supply state that the higher the price lower the quantity, this can be encapsulate that there must be equity between demand and supply

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BOMAI YAL July 4, 2012 at 8:34 pm

economic is intresting, its happening in the real life situation of every day, how people struggle to live their life in this morden world were every thing is money…

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MBEWE TIMOTHY July 9, 2012 at 3:19 am

I love economics so much and i will be writing the exams this october at ymca zambia. I look forward to be an economist one day.However,i have financial problems.

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Dabirichi May 2, 2013 at 4:57 am

please, my dear at this rate i dont think you can make a good economist. if you want, you can think out how to raise the capital. we dont beg before geting what we want.

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Mohammed s.i September 6, 2012 at 2:23 am

The laws ar perfect.

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sarah September 21, 2012 at 12:19 pm

i do not agree .

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Nwafor Valentine October 4, 2012 at 12:42 pm

The law is so relevant, it’s what we exprienced everyday. I love economics.

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Bloice Davison November 11, 2012 at 1:26 pm

I went to an economics seminar yesterday. One of the presenters claimed to have the graph of supply and demand curves tattooed on his arm, with the caption, “[t]hese laws cannot be broken.” He’s right.

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ali January 29, 2013 at 5:56 pm

economic is bullshit man

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kay March 22, 2013 at 12:34 am

The four basic laws of supply and demand are.
1. If demand increases and supply remains unchanged, a shortage occurs, leading to a higher equilibrium price.
2. If demand decreases and supply remains unchanged, a surplus occurs, leading to a lower equilibrium price.
3. If demand remains unchanged and supply increases, a surplus occurs, leading to a lower equilibrium price.
4. If demand remains unchanged and supply decreases, a shortage occurs, leading to a higher equilibrium price.

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Bulala July 9, 2013 at 9:56 am

The laws are right? But what about if the cost of production remain unchange.

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Godgift orupabo August 12, 2013 at 4:26 am

Economy is very very good, i do study it and it’s important in the life of a human, i want to writ my exams but i need financial support please. The account number is 6231937334, Godgift orupabo tanks

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lawa Bala Idris August 22, 2013 at 7:50 am

I will go to university intentionally to read economics

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ACHIKA SUNDAY October 14, 2013 at 2:50 am

I like economic b/cs is part of human life.

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Daodu Elizabeth November 11, 2013 at 1:22 pm

I now luv economic

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Adekolade joe January 8, 2014 at 10:40 am

I love economices very well but i did not know the caculation plz help me ooooo. The law of demand state that the higher the price the lower of a commondities we be supply WHY the law of supply state that the lower the price the higher of a commondities we be supply visevalser

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