Supply and demand are the two forces that guarantee the functioning of a market, determining the prices and the quantity of products offered. The term offer refers to the available quantity 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 buy of this product, that is, their demand.
Sellers determine the quantity of products offered, their offer. It is influenced by the price of this product in 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 an equilibrium point.
Law of supply and demand
The law of supply and demand, developed by Adam Smith in classical economics, 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 scarce, its price tends to increase.
This upward and downward price movement would eventually cause the market to reach an equilibrium point, at which supply equals demand.
However, this model would work only in a market with perfect competition, that is, in which there are many sellers and many buyers. This situation would make 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 have seen, presents the following elements:
Graphically, supply is a positive slope curve, that is, increasing. It relates the quantity of products marketed to the price that 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 may be affected by other factors, such as the cost of production. Lower costs can motivate producers to offer more products, even though their market price remains the same.
The demand curve relates the willingness of consumers to buy with the sale price of the product. This curve has a negative (decreasing) slope, because the higher the price of the product, the less interest the consumer will have in buying.
Changes in consumer tastes, the appearance of competitors, and variation in population incomes can alter this relationship. For example, if the population has greater purchasing power, consumers will be able to increase the demand for certain products, even if the price has not changed.
Supply and demand balance
The point on the graph where the supply curve meets the demand curve is called the break-even point. It indicates the price that the product must have so that its offer in the market is equal to its demand.
When market equilibrium is reached, there is no excess or shortage of output, and the trend is for prices to stabilize.
However, this stability may be affected if external factors arise, such as new competitors, an economic crisis or new technologies. The change in the market will then change its break-even point. To achieve this again, the price of the product will have to rise or fall, following the movement of supply and demand.