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Money and Finance

Supply and Demand

A Basic Law of Economics

Supply and demand is one of the basic ideas of economics. In a free market, the price of a product is determined by the amount of supply of the product and the demand for the product.

What is supply?

The supply of a product is how much of the product is available for purchase at a given price. The law of supply says that as the price of a product increases, companies will build more of the product.

When graphing the supply vs. the price of a product, the slope rises as shown in this graph.



What is demand?

Demand of a product is the amount of product that people want to buy at a given price. The law of demand says that as the price of a product increases, the less of that product people will want to buy.

When graphing the demand vs. the price of a product, the slope falls as shown in this graph.



How Supply and Demand Determine Price

There are four basic laws that describe how supply and demand influence the price of a product:

1) If the supply increases and demand stays the same, the price will go down.
2) If the supply decreases and demand stays the same, the price will go up.
3) If the supply stays the same and demand increases, the price will go up.
4) If the supply stays the same and demand decreases, the price will go down.

Market Equilibrium

Market equilibrium is when the supply of the product equals the demand of the product. The market for a product will move towards equilibrium over time.

Equilibrium can be shown on a graph. It is where the supply and the demand curves intersect.



Changes in Supply and Demand

Supply and demand can suddenly change. This can cause a "shift" in the demand or supply curves. Any number of factors can change the supply or demand. For example, the demand for a football team's jerseys would go up if they won the Super Bowl. Also, the supply for those same jerseys may go down if the factory that made them burnt down.

See the graph for an example of a demand curve shift.



Here are some things that can change demand:
Here are some things that can change supply:

Learn More about Money and Finance:

Personal Finance

Budgeting
Filling out a Check
Managing a Checkbook
How to Save
Credit Cards
How a Mortgage Works
Investing
How Interest Works
Insurance Basics
Identity Theft

About Money

History of Money
How Coins are Made
How Paper Money is Made
Counterfeit Money
United States Currency
World Currencies 		Money Math

Counting Money
Making Change
Basic Money Math
Money Word Problems: Addition and Subtraction
Money Word Problems: Multiplication and Addition
Money Word Problems: Interest and Percent

Economics

Economics
How Banks Work
How the Stock Market Works
Supply and Demand
Supply and Demand Examples
Economic Cycle
Capitalism
Communism
Adam Smith
How Taxes Work
Glossary and Terms

Note: This information is not to be used for individual legal, tax, or investment advice. You should always contact a professional financial or tax advisor before making financial decisions.

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