When we talk about supply and demand we are in the sphere of economics. Supply and demand are related to prices, wages, the market and the economy in general.
The law of supply and demand
The economic system that governs the economy is capitalism and the set of economic activity is known as the market, which is governed by supply and demand. Demand is the amount of goods or services that consumers are willing to buy in the market. Supply is the amount of goods or services that can be sold at a given price at a given time. The relationship between supply and demand arises the price of a product or service. This means that if there is a great demand for a product and few offers, the price tends to go up, but if there is a lot of supply of a product, its price tends to go down. This mechanism is known as the law of supply and demand.
The law of supply and demand is quite intuitive. It tells us that companies will be willing to offer a very small quantity of something at low prices, but at higher prices they will offer more of a product. In other words, by increasing the selling price a company will be willing to sell more. However, with respect to demand something different happens, since the consumer will be willing to consume a lot if there are low prices and will consume little if prices are high.
In this way, if we put together the supply and demand mechanism in a graph that expresses its evolution, it is observed that there is a point at which both issues come together, so that the supply is equal to the demand.
This implies a market equilibrium situation, in which consumers and sellers reach a kind of natural agreement on the final price of a product. As is logical, said agreement does not exist in reality but rather it is the dynamics of the market itself.
The law of supply and demand is in turn related to the changes and transformations that affect the economy. Suppose a technology undergoes a significant improvement. In this case, this circumstance will affect the price of said technology (the technological product will be sold at a lower price and in a greater quantity). Let’s take a concrete example: if a more efficient robot is used to manufacture vehicles in the automobile industry, it will be possible to reduce the cost of each car and sell it at a lower price and at the same time produce more units.
Photos: iStock – mihailomilovanovic / milindri
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