How the law of supply and demand works

In economics, the law of supply and demand determines the formation of prices in the market, between the  offered price and the sought price  .

In this model, consumers search the market for the products and services they want, while existing companies offer these same products.

For this concept, it is considered that consumers look for more and more, the lower the price. On the other hand, companies offer with the price relative to the quantity, that is, the higher the quantity, the higher the price.

There is a balance between supply and demand, which is represented by supply curves when they cross the demand curve, with an equilibrium price in the market.

To understand this representation between supply and demand, it is necessary to consider each one separately, between the law of demand and the law of supply.

How the law of demand works

The law of demand says that the lower the price, the greater the number of consumers looking for products in the market that they want to buy, especially considering the different incomes of each one. This principle is presented in the following example.

Example

As an example, consider 3 different consumers looking to buy a certain product in a store. However, each is willing to pay a different amount than the other for this specific product, which is $ 10.00; $ 15.00; and $ 20.00.

In the graph we can see that, for the lowest price of $ 10.00, the three consumers buy the product in this store, since two of them would pay even more for the product.

This relationship reflects the law of demand as a whole: the lower the price, the more it is sold, since more consumers must purchase it.

How the supply law works

The supply law refers to the extent to which entrepreneurs are willing to sell their products. In a simple way, we consider that the price increases with the quantity. For example, a merchant offers one product at a price of $ 1.00 and two of these products for $ 2.00, since if he charges $ 1.00 he will deliver one of the products “free”.

Therefore, we can graphically consider this relationship, using an example.

Example

Considering that a merchant offers his product at the price of $ 5.00 per unit, that is, two units, the aggregate price is $ 10.00, three units for $ 15.00, and so on.

According to the theory of supply, the trader sells with the objective of obtaining his profits, therefore, the positive slope of the supply curve. Otherwise, you would sell your products at lower prices and lose money.

Changes in the balance between supply and demand.

The characteristics of the quantity demanded and supplied are not always the same, that is, they can be modified, either by demand or by offer, which alters the balance of the market.

One of the best examples of this change is in the history of personal computers (PCs). At the beginning, the prices offered were very high and few people could afford this product. Over the years, manufacturers have been able to start lowering their prices and the number of consumers has started to increase, for the scenario we know today.

Another example that can modify demand is taxes, since with them the offered price is slightly higher than what the merchant would like.

Both the supply and demand laws are determined by a condition called  Ceteris Paribus  , which says that other factors that can also modify this law, such as the increase in consumer income, are not considered.

Learn more about what  Ceteris Paribus status is  and how it applies to the law of supply and demand.