The law of supply and demand combines two fundamental economic principles describing how changes in the price of a resource, commodity, or product affects its supply and demand. As the price increases, supply rises while demand declines. Conversely, as the price drops supply contracts while demand grows.
The Law of Demand
The law of demand holds that demand for a product changes inversely to its price ceteris paribus. This means that’s the higher the price, the lower the level of demand. It stands to reason that buyers have finite resources which means that their spending on a given product or commodity is limited. Higher prices reduce the quantity demanded. Conversely, demand rises as the product becomes more affordable or as prices are reduced
It is clearly notable that as the price of goods or services increases quantity demand will decrease. However, there are exceptions to this phenomenon.
The increase in the price of needs such as food and accommodation may not necessarily reduce demand because consumers may not be able to do without these. The next best option for consumers will be to reduce on other luxury goods while dedicating their finite resources to needs.
The Law of Supply
The law of supply relates to price changes for a product with the quantity supplied. Contrary to the law of demand, the law of supply relationship is direct, not inverse.
The higher the price, the higher the quantity supplied. Lower prices means reduced supply ceteris paribus. Higher prices give suppliers an incentive to supply more of the product or commodity, assuming their costs aren’t increasing as much. Lower prices result in a cost squeeze that curbs supply. It then stands to reason that the supply cure is upward sloping from left to right. From the diagram above, it is evident that when prices increase, the quantity supplied subsequently increases while the opposite is true.
demand and supply
Consumer Income is the money earned through employment, investment, or inheritance. A consumer’s income could be affected by a change in wages and this contributes to changes in demand.
Consumer Tastes and Preferences can include style trends or news relating to products. Consumers may buy more red jeans because a famous celebrity wore them on a televised awards ceremony.
The Price of a Substitute Good means the consumer cost for a substitute good can affect the demand for the desired product. Coffee drinkers discovering that tea is less expensive and contains the same amount of caffeine as coffee could cause the demand for coffee to drop
The Price of a Complementary Good means the consumer cost for a good that is made with or is used with the desired product. Cereal lovers will cut back on buying cereal when the price of milk dramatically increases.
Input costs entail expenditure that producers (businesses, corporations, manufacturers) incur in the development of a product. Employee wages and the costs of raw materials are main examples. If a company gives raises to all of its workers, then it will cut back on making a product to offset the increased costs.
Producer Future Expectations means producers predict the costs of products. A company producing jerseys may believe their jerseys will be valued more during winter. This instinct could mean they withhold production of jerseys until winter while ultimately decreasing the supply of jerseys during summer.
Price of Other Outputs means producers may use the same resources to make a different product. If a company finds making soda rather than juice less expensive, then they will produce more soda thereby decreasing the supply of juice.