The Law of Supply and Demand

supply_and_demand

Definition By Investopedia:

The law of supply and demand is the theory explaining the interaction between the supply of a resource and the demand for that resource. The law of supply and demand defines the effect that the availability of a particular product and the desire (or demand) for that product has on price. Generally, if there is a low supply and a high demand, the price will be high. In contrast, the greater the supply and the lower the demand, the lower the price will be.

Definition by Wikipedia:

In microeconomics, supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good, or other traded item such as labor or liquid financial assets, will vary until it settles at a point where the quantity demanded (at the current price) will equal the quantity supplied (at the current price), resulting in an economic equilibrium for price and quantity transacted.

More Explanation:

The Law of Supply and Demand is more appropriately an economic model through which price movement of goods and services is determined, though it is termed as ”Law” but strictly speaking it is not merely a law. If demand of any good or service increases while supply remains constant, prices for goods or services will rise, or If supply of any good or service increases while demand remains constant, prices for goods or services are likely to drop.

Let us understand using the example of Housing Market, If more buyers are willing to pay more for a house or apartment, owners rush for selling, adding more supply of houses in the market, likely to drop prices for houses, If more buyers are unwilling to buy for premium price for houses, owners are unlikely to sell their houses hence decreasing supply, likely to surge prices.

 

Leave a Reply

Your email address will not be published. Required fields are marked *