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What Is the Law of Supply and Demand?

It’s important to understand this basic economic principle.

If you notice a yellow highlight on the page, hover over it for the definition!

Have you walked through a supermarket and wondered why oranges, beef, and a box of Oreo cookies are priced the way they are? Well, various economic and societal factors explain the costs, but the most important aspect is the law of supply and demand.

What is 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.

Eventually, markets move toward a balance, 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.

Examples

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.

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!

Andrew Moran

Economics Correspondent at LibertyNation.com and LNGenZ.com. Andrew has written extensively on economics, business, and political subjects for the last decade. He also writes about economics at Economic Collapse News and commodities at EarnForex.com. He is the author of “The War on Cash.” You can learn more at AndrewMoran.net.

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