What is supply and demand?

Abbreviated as SND by AbbreviationFinder.org, supply and demand are the two forces that guarantee the functioning of a market, determining prices and the quantity of products offered. The term offer refers to the quantity available of a product, that is, the quantity that companies want or can sell. Demand, on the other hand, is the quantity that consumers want or can purchase from this product, that is, their demand.

The quantity of products offered – their offer – is determined by the sellers. It is influenced by the price of this product on the market, the cost of inputs and technology, for example.

The consumer is the one who establishes the demand. The demand for a product depends on factors such as its price, the purchasing power of the population, tastes and fashion, the existence of similar or substitute products on the market, among others.

In Economics, the relationship between supply and demand is represented by a graph where there is a single meeting point known as a balance point.

Relationship of supply and demand for a product on the market and the formation of its price.

Supply and demand law

The law of supply and demand, developed by Adam Smith in the classical economy, is an economic concept that relates the determination of the price of a product with its demand and supply in the market.

Also called the law of supply and demand, this theory says that if there are more products than are interested in buying them, prices tend to fall. On the other hand, if a product is in short supply, its price tends to increase.

This movement of rising and falling prices would cause the market to eventually reach a point of equilibrium, in which supply is equal to demand.

This model, however, would work only in a market with perfect competition, that is, in which there are many sellers and many buyers. This situation would render these economic agents unable to change the price balance on their own.

Supply and demand curves

Supply and demand, when represented by a graph like the one we’ve seen, presents the following elements:

Supply curve

Graphically, supply is a positive slope curve, that is, increasing. It relates the quantity of products placed on the market to the price the producer receives for them. The higher the price, the greater the quantity of products that sellers will be willing to offer.

The positioning of this curve on the graph can be affected by other factors, such as production cost. Lower costs can motivate producers to offer more products, even though their market price remains the same.

Demand curve

The demand curve relates consumers’ willingness to buy to the product’s selling price. This curve has a negative slope (decreasing), because the higher the price of the product, the less the consumer will be interested in purchasing.

Changes in consumer tastes, the emergence of competitors and the variation of the population’s income can alter this relationship. For example, if the population has greater purchasing power, consumers will be able to increase demand for certain products, even if the price has not changed.

Balance of supply and demand

The point on the graph where the supply curve and the demand curve intersect is called the equilibrium point. It indicates the price that the product needs to have so that its offer in the market is equal to its demand.

When market equilibrium is reached, there is neither excess nor scarcity of product, and the tendency is for prices to stabilize.

This stability, however, can be affected if external factors arise, such as new competitors, an economic crisis or new technologies. The change in the market will then shift its equilibrium point. To achieve it again, the price of the product will have to rise or fall, following the movement of supply and demand.

supply and demand