Have you walked through a supermarket and wondered why oranges, beef, and a box of Oreo cookies are priced the way they are? Do you ever think about why gasoline prices fluctuate day to day? Well, various economic and societal factors explain the costs – long- and short-term – of all goods and services. But the most important aspect is the law of supply and demand.
What is Supply and Demand?
In the world of economics, an important theory is the law of supply and demand. The concept explains the relationship between the sellers of a good or service and the buyers of that particular resource, defining the effect the interaction has on the product’s value.
At the most basic level, low supply and high demand will increase prices. On the other hand, high supply and low demand will decrease them. The law of demand dictates that buyers will demand less of a good or service at greater prices, and the law of supply states that sellers will increase supplies of an economic good at elevated rates.
There are plenty of independent factors that can impact markets and supply and demand.
For supply, these factors can include:
- Output costs (labor, materials, and energy).
- Production capacity.
- Size of market competition.
- Dependability of supply chains.
For demand, some factors can be:
- Consumer preferences.
- Market availability of alternatives.
- Pricing shift for product add-ons.
- Economic Conditions (recession versus expansion).
- Personal finances.
Eventually, markets move toward an equilibrium, also known as market-clearing. This is when producers sell all the units they produce, and buyers purchase all the units they want. Put simply, the quantity of the supply matches the quantity demanded. This is the best outcome for all parties, and the actors will usually reach this conclusion.
The weather in Brazil, Vietnam, and Colombia is affecting production levels of coffee beans. This causes global supply levels to tumble. Eventually, the price of coffee skyrockets as more people want coffee than there are beans available. This would be an example of the law of supply. To take advantage of higher prices, producers will try everything to ramp up production.
A new restaurant owned by Gordon Ramsay opens in your city. It has become the talk of the town, generating huge publicity – and the reviews are great, too. Unfortunately, there are not enough tables to accommodate the huge influx of interested patrons, so the demand for reservations goes through the roof. The restaurant could then raise prices or increase the number of tables to limit the inflow.
It’s Just Economics
The laws of supply and demand are instrumental to everything from the global economy to your local marketplace. They can send important signals to producers and consumers alike and provide us with a lot of information about the state of an economic good. It is basic economics!