Supply and demand is the basic knowledge of economics which used everywhere in the market. We have to understand what is supply how it is created and what is demand how it is generated. Once you master the basic principle of supply and demand you can make better decisions while considering any investment or trading options. This is one of the important factor in investing along with business cycle, market forces, competition, geopolitical scenario and government and central banks policies.

Before understanding supply and demand, we must know about market. Market is place where there are buyers and sellers transact goods and services between them willingly. Buyers wants goods and services and sellers provides them in exchange of some monetary exchange. Buyers and sellers together form the marketplace. Market has seen many evolutions from the barter system to our current currency and recent addition of digital money. Barter is a very old system of trading goods for other goods of same value. For example people would trade fish for chicken, wheat for rice. Today we have currency for such transaction and we can pay for the goods and services either cash or digitally.

What is Supply and Demand

Supply is the provision of goods and services by the people or company that produces it. Manufacturer produces goods, professionals provide services. Demand on the other hand is what the other buyer desires and wants to buy. It could be food, entertainment, information, it could be anything as long as there is a seller who can provide it.

There’s two important laws, the Law of demand and the Law of supply.Let’s take a simple example to understand the concept more clearly. Buyer wants to buy Lemons for certain price. Seller who could be a farmer who produces lemons is willing to sell them to the buyer at a certain price. Only when the price matches of both the buyers and sellers the exchange happens. Now the Law of Demand tells that when the price of lemons goes up, the demand will go down, they will ask for less lemons. The Law of Supply says that when the price goes up, the farmer will produce more lemons, hence increasing the supply. It is an inverse relationship. When the price of buyer and seller matches, it is called the optimal price where the demand and supply are the same which is an equilibrium.

Price determination

Price is what the buyer pays for in exchange for the goods and services produced and provided by the seller. The seller determines the price to generate profits. The buyer wants to save more by paying less. This is the most common human psychology. Rationally everyone wants the opportunity to benefit themselves, and there is a common point called an optimal price that is acceptable to both buyer and seller.

Profit and savings are the motivations for sellers and buyers. First, we look from a buyer’s perspective, he will want to save more and look for cheaper alternatives. In the graph above, the demand curve is downward sloping. The higher the price the lower will be the demand, lower the price more the demand. Similarly, suppliers will increase the supply if the price is high which will lead to higher profits. As the price goes down, so will the supply of the product.

The most common use can be seen in the stock market, where there is continuous trading is going on during market hours.

I hope you now have a basic understanding of supply and demand.