The concepts of supply and demand curves are definitely familiar to those who have encountered Economics at some stage in their lives. Yet, supply and demand curves are a fundamental concept that is applied on a wide variety of areas and fields, ranging from the market economy to everyday life.
What is demand?
Demand refers to the quantity of a product that is demanded by the pool of buyers. In simpler words, it is the amount of a product or service that customers are willing to buy at a certain price point. Demand depends on the consumer’s needs and wants which is in turn affected by various factors such as market trends, personal tastes, consumer income etc.
What is supply?
On the other hand, supply is the quantity of a product that can be supplied by producers when receiving a certain price. Similarly, supply may be affected by various factors including available raw materials and input, government policies, production technology and natural factors.
Supply and Demand Equilibrium
When supply and demand interact with each other, an equilibrium that compromises the price and quantity of the product or service is generated. The equilibrium is situated when the quantity demanded is equal to the quantity supplied. Any changes within supply and demand curves will affect the equilibrium:
- When supply exceeds demand there is a supply surplus. In order to return to equilibrium suppliers will need to lower their price in order to attract buyers and increase demand.
- When demand exceeds supply there is a shortage. In this scenario, suppliers can increase their prices in order for demand to be decreased.
Shifts in supply and demand curves
Increases and decreases in supply and demand curves are graphically illustrated by shifts of the supply and demand curve. Increases are represented by right shifts to the curve while decreases are represented by left shifts to the curve. There are four possible market changes that could occur and are explained in more detail below:
1. Supply increases: When supply increases and demand remains the same there is going to be a surplus and price will decrease.
2. Supply decreases: When supply decreases and demand remains the same there is going to be a shortage and price will increase.
3. Demand increases: When demand increases and supply remains the same there is going to be a surplus and price will increase.
4. Demand decreases: When demand decreases and supply remains the same there is going to be a surplus and price will decrease.
The principles of supply and demand date back to old times with several economists writing about it. Since then, the concept of supply and demand has been updated and rejuvenated to fit today’s tumultuous business landscape. The main concept you have to know behind the idea of supply and demand is that the market equilibrium is situated at the point which supply and demand intersect, and any changes along these curves will redefine this equilibrium.