What is the Law of Supply and Demand?

The law of supply and demand reflects the relationship between the amount of goods or services demanded and the available supply of goods and services. The law of supply and demand states that a change in one causes a change in the other. 

How Does Supply Affect Demand?

According to the law of supply and demand, when there is higher demand for a commodity, there is a rise in the supply of such commodity and vice versa.  

How Does Supply and Demand Affect Price?

If the supply of a product is low and the demand is high, it means such product is scarce and insufficient for the number of people that want it. Hence, it will lead to an increase in the price of the product.

When there is excess supply in the market and a low demand for the supplied products, there is a decrease in the price of goods.

What is an Equilibrium Price?

An equilibrium price is the price at which the amount supplied at a given price equals the amount demanded by customers at that price. 

Factors Affecting Supply

The following factors directly affect supply:

• the capacity of a producer or company
• the costs of producing specific items including cost of materials, labor, and equipment 
• the presence of competitors in the market
• the weather, if the production of an item is determined by weather
• the supply chain 

Factors Affecting Demand

The common factors that affect demand are;

• The cost of a product, that is, the price at which the product will be purchased.
• The availability of other alternatives in the market.
• The importance of the product, whether it is an inferior good or otherwise.
• The price of complementary products.

Do Supply and Demand Only Affect Prices?

The law of supply and demand is an economic theory that affects diverse economic principles and not just the concept of 'price.' For instance, supply and demand is an important gauge for measuring economic growth and it is important when calculating the gross domestic product (GDP) of a country for a particular time. The rate of employment and unemployed can also be determined. The law of demand and supply is also applicable to wages for labor, business growth, among others.

Related Topics

• Budget Constraint
• Radner Equilibrium
• Opportunity Cost
• Opportunity Set
• Marginal Analysis
• Utility

• Self Interest
• Cost-Benefit Analysis
• Enlightened Self-Interest
• Fisher's Separation Theorem
• Ratchet Effect

• Total Utility (Economics)
• Efficiency Principle
• Expected Utility
• Subjective Theory of Value
• Positional Goods
• Utilitarianism
• Indifference Curve
• Time Preference Theory of Interest
• Incentives
• Marginal Benefit

• Diminishing Marginal Utility
• Sunk Costs
• Production Possibilities Frontier
• Law of Diminishing Returns
• Economic Efficiency
• Efficiency Theory
• Productive Efficiency
• Capacity Utilization Rate
• Allocative Efficiency
• Pareto Efficient
• Comparative Advantage
• Criticisms of the Economic Approach
• Behavioral Economics
• Normative Economics
• Positive Economics
• Invisible Hand
• Sunk cost