What are supply and demand?

Supply describes quantities producers are willing to sell at different prices; demand describes quantities consumers are willing and able to buy at different prices. The relationship concerns a particular period and market. Wanting something without the ability to pay is not economic demand.

How do supply and demand work?

1. The demand relationship Other things equal, a lower price usually increases quantity demanded. Income, preferences, the number of consumers and prices of related products also matter. A change in the product’s own price causes movement along the demand curve; changes in income or preferences can shift the curve. 2. The supply relationship Higher prices usually encourage producers to supply more, subject to capacity, time and input constraints. Lower production costs or better technology may allow more output at the same price. Weather can strongly affect agricultural supply. 3. Market equilibrium In the simple model, equilibrium is the price and quantity at which quantities supplied and demanded are equal. Prices below equilibrium can produce shortages; prices above it can leave unsold stock. Contracts, imperfect information and adjustment delays can prevent real markets from reaching this point immediately.

Everyday examples and limits of the model

4. Why does a product become more expensive? Frost can reduce fruit production, contracting supply and raising prices. A simultaneous fall in consumer incomes may weaken demand. Both sides must be considered: rising prices do not always indicate expanding demand. 5. Elasticity Elasticity measures how responsive quantity is to changes in price or income. Close substitutes, the share of household spending and time available to adjust affect responsiveness. Short-run and long-run outcomes may differ. 6. Equilibrium and social outcomes Market equilibrium does not mean everyone’s needs are met or that the outcome is fair. Monopoly power, externalities and information problems change the simple model’s assumptions. Taxes, subsidies and price limits should be evaluated for their combined effects on production and access.