A key aspect of economic theory is the interaction between the demand for a product or service and its supply. It is a fundamental concept that has been influencing and defining business, financial, political and economic policymaking for centuries.
Demand describes the willingness of people to buy a specific good or service at a certain price. Consumers’ preferences, incomes, and willingness to substitute one good for another determine the quantity they will buy of a given good or service.
When a good or service is in high demand, the market will find “equilibrium” prices that match the supply of goods and services. At these prices, each producer can sell all the goods or services he wants to produce and each consumer can buy all the goods or services she needs.
The resulting equilibrium price is called the market-clearing price, or the “equilibrium value.”
In addition to producing a market-clearing price, markets also seek to find “equilibrium” quantities for different commodities, which are defined as a point at which the quantity of each good or service supplied equals the quantity demanded.
Regardless of the exact shape and position of the supply curves, the equilibrium quantity is the point at which the demand curves meet. This is also the point at which the demand and supply functions are mathematically equated.
There are many factors that influence the price elasticity of demand for a given commodity, including changes in consumer preferences, industry dynamics and tax laws and regulations. Some of these may limit the price elasticity for a particular good or service, while others cause disproportionate price changes for essential products.
Some factors affect the price elasticity of supply, as well. Some of these include the availability of resources needed for production, changes in consumer preferences and innovations in technology.
When a product is in low demand, manufacturers may increase production of that product to maximize profits and take advantage of consumer interest. This can result in higher prices for that good or service, but it can also lead to a lessening of demand by consumers.
The number of goods and services that are available in an economy is known as the supply schedule. This schedule is influenced by the demand schedule and can vary depending on the seasons, temporary or permanent changes in the supply of that good or service.
A good or service might be in low demand during a seasonal change, such as an upcoming hurricane, when people might purchase large quantities of that product to be ready for the event. It is also possible for a product to be in low demand during a period of economic crisis or recession, when people might want to stock up on certain items to be prepared.
Alternatively, an item might be in low demand during a period of normal supply, such as when consumers have high incomes and are willing to spend their money on goods and services that they believe will increase their wealth or improve their standard of living.