The law of supply and demand is perhaps one of the most fundamental concepts and it is the backbone of a market economy.
Demand refers to the quantity of a product or service that buyers want.
The quantity demanded of a product is the quantity that people are willing to buy at a given price; the relationship between the price and the quantity demanded is known as the demand ratio.
Supply represents how much the market can supply.
The quantity supplied of a given good is the quantity that producers are willing to supply when they receive a given price.
The correlation between the price and the quantity of a good or service supplied to the market is known as the supply ratio.
Price, therefore, is a reflection of supply and demand.
The relationship between demand and supply underlies the forces behind the allocation of resources.
In theories of market economics, the theory of demand and supply will allocate resources in the most efficient way possible.
How? Let us take a closer look at the law of demand and the law of supply.
The law of demand
The law of demand states that, all other things being equal, the higher the price of a good, the less people will demand that good.
In other words, the higher the price, the smaller the quantity demanded.
The quantity of a good that buyers purchase at a higher price is less because as the price of a good rises, so does the opportunity cost of buying that good.
As a result, people will naturally avoid buying a good that forces them to forego consumption of something else they value more.
The graph below shows that the curve is downward sloping:
A, B and C are points on the demand curve. Each point on the curve reflects a direct correlation between quantity demanded [Q] and price [P].
Thus, at point A, the quantity demanded will be Q1 and the price will be P1, and so on.
The demand ratio curve illustrates the negative relationship between price and quantity demanded.
The higher the price of a good, the lower the quantity demanded [A], and the lower the price, the more the good will be demanded [C].
The law of supply
Like the law of demand, the law of supply shows the quantities that will be sold at a given price.
But unlike the law of demand, the supply ratio shows an upward slope.
This means that the higher the price, the higher the quantity supplied.
Producers supply more at a higher price because selling a higher quantity at a higher price increases revenue.
A, B and C are points on the supply curve.
Each point on the curve reflects a direct correlation between quantity supplied [Q] and price [P].
At point B, the quantity supplied will be Q2 and the price will be P2, and so on.
Time and supply
However, unlike the demand relationship, the supply relationship is a factor of time.
It is important for supply because suppliers must, but cannot always, react quickly to a change in demand or price.
Therefore, it is important to try to determine whether a price change caused by demand will be temporary or permanent.
Say there is a sudden increase in demand and price for umbrellas in an unexpected rainy season; suppliers can simply accommodate the demand by using their production equipment more intensively.
However, if there is a climate change and the population needs umbrellas all year round, the change in demand and price is expected to be long-term; suppliers will have to change their equipment and production facilities to meet long-term demand levels.
Definition: Quantity supplied is the quantity of a commodity that producers are willing to sell at a particular price at a particular point of time.
Description: Different quantities can be supplied at different prices at a particular point of time. When all the prices along with quantity supplied are drawn on a graph, the supply curve is formed. Quantity supplied can change at the same price depending upon factors like recession, changes in the prices of the raw materials, etc.
While every effort has been made to follow citation style rules, there may be some discrepancies. Please refer to the appropriate style manual or other sources if you have any questions.
Select Citation Style
Copy CitationShare
Share
Share to social media
Facebook Twitter
URL
//www.britannica.com/topic/supply-and-demandGive Feedback
External Websites
Feedback
Corrections? Updates? Omissions? Let us know if you have suggestions to improve this article [requires login].
Feedback Type
Your Feedback Submit FeedbackThank you for your feedback
Our editors will review what you’ve submitted and determine whether to revise the article.
External Websites
- Social Studies for Kids - Supply and Demand
- Government of Alberta - How demand and supply determine market price
print Print
Please select which sections you would like to print:
- Table Of Contents
verifiedCite
While every effort has been made to follow citation style rules, there may be some discrepancies. Please refer to the appropriate style manual or other sources if you have any questions.
Select Citation Style
Copy CitationShareShare
Share to social media
Facebook Twitter
URL
//www.britannica.com/topic/supply-and-demandFeedbackExternal Websites
Feedback
Corrections? Updates? Omissions? Let us know if you have suggestions to improve this article [requires login].
Feedback Type
Your Feedback Submit FeedbackThank you for your feedback
Our editors will review what you’ve submitted and determine whether to revise the article.
External Websites
- Social Studies for Kids - Supply and Demand
- Government of Alberta - How demand and supply determine market price
Alternate titles: consumer demand, supply
By The Editors of Encyclopaedia Britannica
Table of Contentsrelationship of price to supply and demand
See all media
Key People:Thomas Malthus Angus Deaton J.-B. Say William Stanley Jevons Alvin E. Roth...[Show more]Related Topics:consumer surplus elasticity supply curve demand curve indifference curve...[Show more]
See all related content →
Summary
Read a brief summary of this topic
supply and demand, in economics, relationship between the quantity of a commodity that producers wish to sell at various prices and the quantity that consumers wish to buy. It is the main model of price determination used in economic theory. The price of a commodity is determined by the interaction of supply and demand in a market. The resulting price is referred to as the equilibrium price and represents an agreement between producers and consumers of the good. In equilibrium the quantity of a good supplied by producers equals the quantity demanded by consumers.
Demand curve
The quantity of a commodity demanded depends on the price of that commodity and potentially on many other factors, such as the prices of other commodities, the incomes and preferences of consumers, and seasonal effects. In basic economic analysis, all factors except the price of the commodity are often held constant; the analysis then involves examining the relationship between various price levels and the maximum quantity that would potentially be purchased by consumers at each of those prices. The price-quantity combinations may be plotted on a curve, known as a demand curve, with price represented on the vertical axis and quantity represented on the horizontal axis. A demand curve is almost always downward-sloping, reflecting the willingness of consumers to purchase more of the commodity at lower price levels. Any change in non-price factors would cause a shift in the demand curve, whereas changes in the price of the commodity can be traced along a fixed demand curve.
Supply curve
The quantity of a commodity that is supplied in the market depends not only on the price obtainable for the commodity but also on potentially many other factors, such as the prices of substitute products, the production technology, and the availability and cost of labour and other factors of production. In basic economic analysis, analyzing supply involves looking at the relationship between various prices and the quantity potentially offered by producers at each price, again holding constant all other factors that could influence the price. Those price-quantity combinations may be plotted on a curve, known as a supply curve, with price represented on the vertical axis and quantity represented on the horizontal axis. A supply curve is usually upward-sloping, reflecting the willingness of producers to sell more of the commodity they produce in a market with higher prices. Any change in non-price factors would cause a shift in the supply curve, whereas changes in the price of the commodity can be traced along a fixed supply curve.