As consumers, we are constantly in need of products and services. On the other hand, producers can only distribute a certain amount of these products and services. The dynamic relationship between the needs of consumers and producers is known as the concept of supply and demand.
Supply is the total amount of products and services available to consumers. For example, a local grocery store may have a total of 100 apples in stock, meaning consumers can buy up to 100 apples from this grocery store.
Demand is the total amount of products and services desired by consumers. For example, a local grocery store may have customers who want to buy 150 apples. Keeping with the example from supply, the grocery store would not have enough apples to meet demand.
When demand is greater than supply, a shortage can occur. When demand is lower than supply, a surplus can occur. When demand and supply are equal, equilibrium occurs. Equilibrium is the main goal of any economy as both consumers and producers want to be satisfied.
Supply and demand primarily revolve around price. When an item’s price is high, demand is low. Therefore, companies will lower the item’s price to increase demand, which helps them reach equilibrium. When an item’s price is low, demand is high. In this case, companies will raise the item’s price to lower demand, helping them reach equilibrium.
The most obvious example of supply and demand in the real world is oil. When demand for oil is high, producers will increase their prices to generate more income. Conversely, when demand for oil is low, producers will decrease their prices to incentivize people to buy it.
By understanding the concept of supply and demand, you can become a more informed and financially smart consumer!