Economics 101: Supply, Demand, and Price

1. Demand:

This refers to how much of a product or service consumers want. As a rule:

When the price of a product is low, more consumers are willing to buy it.

When the price is high, fewer people are interested in buying it.

2. Supply:

This refers to how much of a product producers are willing to create and sell. As a rule:

When prices are high, producers are more motivated to produce more because they stand to make more profit.

When prices are low, producers make less profit and are less willing to produce the good.

3. The Law of Supply and Demand:

This is the economic principle that explains how the interaction between supply and demand determines the price of a product.

Let’s look at it in action.

Example:

Imagine a new smartphone is introduced to the market.

Demand: Consumers are excited about the new features, so demand is high. They are willing to pay a premium for the phone.

Supply: At first, only a limited number of phones are available because production takes time to scale up.

Since demand is high and supply is limited, the price of the smartphone will be high.

Market Equilibrium:

The price where the quantity of the product consumers want (demand) equals the quantity producers are willing to supply is called the equilibrium price.

If the price is too high, fewer people will buy the product, leading to excess supply (surplus).

If the price is too low, consumers will buy more than producers are willing to supply, leading to a shortage.

At the equilibrium price, both producers and consumers are satisfied.

Shifts in Supply and Demand:

Changes in market conditions can shift supply and demand, affecting price.

Demand Shift: If consumers suddenly lose interest in the smartphone due to new competition, demand will decrease, leading to a lower price.

Supply Shift: If a new technology allows for faster production, supply increases. With more phones available, the price may drop as well.

Summary:

Demand: Consumers' desire for a product. More demand raises prices.

Supply: Producers' ability to make and sell the product. More supply lowers prices.

Equilibrium price: 

The balance where supply equals demand.