Economics Terms A-Z
Supply and Demand
One of the most fundamental tenets of economics. Supply refers to the quantity of a product being produced, and demand the quantity consumers wish to buy. In its most basic form, it refers to the theory that the price for a good or service will eventually settle at a point when its demand and its quantity are equal (assuming all other factors remain equal). This is referred to as the equilibrium.
The demand depends, with all other factors being equal, on the price of the commodity. Of course, all other factors are never equal: other goods in the market, the preferences of consumers, and many other things influence the demand of a good. The demand curve generally slopes shows consumers more willing to buy a product when it is cheaper and less willing when it is more expensive. The quantity of a product is also dependent on many factors: how much it costs to make the product, how much substitutes cost in the market, what technology is available, and numerous other things.
The theory is used to help businesses define how they price their goods. The theory assumes that consumers have the power to influence the price of a good, in that they increase its price if they buy more and make its price decrease when they decide to buy less. As the price increases, consumers are also less likely to purchase the product, and as it becomes cheaper, they are more likely to buy. However, these responses are not necessarily proportional, and this is where elasticity comes into play.