Possibly the most foundational principle in economics, the concept of supply and demand governs prices, production, and consumer behavior, making it vital for entrepreneurs and managers to grasp how it works.
At a basic level, supply and demand describe the interaction between a producer’s ability to make a product available—supply—and consumers’ desire to purchase that product—demand. When these two forces are graphed, they can be used to understand the price and quantity of goods or services in a market.
The Laws of Supply and Demand
Law of Demand: As prices decrease, the quantity demanded increases, and vice versa. This creates a downward-sloping demand curve.
Law of Supply: As prices increase, the quantity supplied rises, and vice versa. This results in an upward-sloping supply curve.
When these two curves intersect, the result is known as the equilibrium point—the price and quantity at which the amount consumers want to buy matches the amount producers want to sell.
What Shifts Supply?
- Subsidies and Taxes
- Technology
- Other Goods
- Number of Sellers
- Expectations for the Future
- Resource Costs
What Shifts Demand?
- Buyers — the number of consumers
- Income
- Tastes and Preferences
- Expectations for the Future
- Related Goods — Complements and Substitutes
Use the acronyms “STONER” for supply and “BITER” for demand to remember the shifters. From there, you can reason through how each factor affects the graph. For example, if resource costs increase, production becomes more expensive, so supply decreases and the supply curve shifts left. If the number of buyers increases, more people want the product, so demand increases and the demand curve shifts right.
Supply and demand are powerful tools for understanding how markets operate and how external factors can influence them. By recognizing the laws that govern these forces, you can make more informed decisions about businesses, markets, and the economy.
“Fundamentally, all marketing exists to influence the supply and demand curve.” — Alex Hormozi