Supply and Demand

Posted on in Todd Talks by Todd Johnson

The concept of supply and demand is a fundamental part of economics. It's a concept that is common sense for some, and a foreign language to others. I wanted to take a stab at explaining it in the simplest form I could.

I think the best way forward is to define all the moving parts and then to explain how they work with and against each other.

Supply is defined as how much of a product or service is available for someone to purchase at a given time.

Demand is defined as is the quantities of goods or services that people are willing and able to buy at a given time.

The Law of Demand states that, if all other factors remain equal, the higher the price of a good or service, the less demand people will have for it.

For example: Let's say, if it's currently raining, that I am in the market for an umbrella. I drive to three different stores and walk to the umbrella displays. Since all factors remain equal, all the umbrellas are exactly the same. But the first store is selling them for $5, the second $10, and the last $15. If the law of demand is correct, the $5 and $10 umbrellas should sell faster than the ones at the store hocking them for $15. And, if your luck is like mine, the first two stores are sold out, forcing you to pay $15 for a $5 umbrella.

Next, The Law of Supply shows the quantities that will be sold at a certain price. This means that the higher the price, the higher the quantity supplied. Meaning that producers will supply more goods and services at higher prices because selling more of something at a higher price increases revenue.

This one is a bit more difficult to grasp but let me try to give a fairly simple example of this:

A few years ago, Nintendo released a console called the NES Classic edition. This was basically a miniaturized version of the original Nintendo system they released in the 1980s but with a ton of the classic games already loaded onto it. So, no need to buy games. Just plug it in and play like it's Christmas morning 1988. Well, when they released this console, they were priced at $59. They quickly sold out everywhere and were being placed on online auction sites for double and triple the price. Nintendo quickly ramped up production and raised the price. They have since released the SNES Classic Edition (Super Nintendo). This is selling for $80. This is a pretty good example of The Law of Supply.

Basically, when demand exceeds supply, price goes up, because more people want the product or service than is readily available, so suppliers can charge more. But when suppliers have a lot of inventory of a product or service, and/or very little demand, they need to get rid of it, so they lower the price to create more demand.