Supply and Demand
Quick Definition
The fundamental economic model describing how the quantity of goods available and buyer desire for them determine market prices.
What Is Supply and Demand?
Supply and demand is the foundational model of price determination in market economies. Demand represents the quantity of a good or service that consumers are willing and able to purchase at various price levels — generally, demand increases as prices fall (the law of demand). Supply represents the quantity that producers are willing to offer at various prices — generally, supply increases as prices rise (the law of supply). The equilibrium price (market-clearing price) occurs where supply and demand curves intersect, balancing the quantity demanded with the quantity supplied. When demand exceeds supply, prices rise (shortage); when supply exceeds demand, prices fall (surplus). Shifts in either curve — caused by changes in consumer preferences, technology, input costs, government policies, or external shocks — create new equilibrium prices. This framework applies across all markets: stocks (buyer/seller imbalance moves share prices), commodities (droughts reduce crop supply, raising food prices), labor (skills shortage raises wages), real estate (limited housing supply with strong demand inflates prices), and currencies.
Supply and Demand Example
- 1When COVID-19 disrupted semiconductor supply while demand for electronics surged, chip prices soared and car production was curtailed for two years
- 2Oil prices crashed to -$37/barrel in April 2020 when pandemic lockdowns destroyed demand while storage capacity ran out
Related Terms
Aggregate Demand (AD)
The total demand for all goods and services in an economy at a given price level and time period, comprising consumption, investment, government spending, and net exports.
Aggregate Supply (AS)
The total output of goods and services that firms in an economy are willing to produce at various price levels during a given time period.
Economic Growth
The increase in the production of goods and services in an economy over time, typically measured by the growth rate of real GDP.
Cost-Push Inflation
Inflation caused by rising production costs (wages, raw materials, energy) that businesses pass on to consumers through higher prices.
Demand-Pull Inflation
Inflation caused by aggregate demand growing faster than aggregate supply, often described as "too much money chasing too few goods."
GDP (Gross Domestic Product)
The total monetary value of all finished goods and services produced within a country's borders in a specific time period.
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