what do the terms “supply” and “demand” mean and how they work together to regulate a market?
In: Economics
In a nutshell, usually as prices drop, producers have less incentive to make things, while consumers have more incentive to buy things, the opposite also holds true, that as prices rise, producers have more incentive to make things and consumers have less incentive to buy things. So if there is too much product on the market and no one is buying, producers tend to either cut prices or stop producing, and there isn’t enough product for all consumers, prices either rise or consumers do without.
That’s the theory of how supply and demand interact with price to regulate the market.
To put it basically:
Supply is how much of something the market has, demand is how much of something the consumer base wants.
High supply, low demand = Lower the price
High demand, low supply = Prices go up
Let’s say as a household we have a chicken that lays eggs. Every day, everyone in the household wants eggs for breakfast, but the chicken only lays one or two eggs a day. That is low supply and high demand.
Because demand is higher than supply, people in the house might start bartering more and more to get the eggs. I might offer to vacuum the living room, but then my wife might counter and offer to vacuum the whole house. Similarly, if something a store sells is in low supply and high demand, the price might go up to reflect that, since some people are willing to pay more to have it.
On the flipside, if there is high supply and low demand, we might start trying to dump the products for less and less. This is especially true for physical goods that require space to store them, since storage has associated costs. This means if there is an oversupply of something, there might be a sale to help get it off the shelf. Imagine a grocery store accidentally orders 100 cases of chocolate bars instead of 10 — they don’t necessarily have room to store that for the weeks it will take to go through them, so they’ll put them on sale to get the space in storage back faster.
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