By Arav Talati. Edited by Arjun Chandrasekar.
The supply and demand relationship is the correlation between the quantity of a commodity that producers sell at different prices and the amount of the product that consumers wish to buy. Supply and demand is the most basic fundamental concept of economics and is the basis for most other economic theories that you might come across. Whether you are a farmer, pharmaceutical manufacturer, or simply a consumer, the supply and demand relationship is most certainly a part of your daily actions. It is a simple economic theory that is easy to relate to for almost everybody.
To understand the exact relationship between supply and demand, we must explore what supply and demand are. The first step in understanding supply and demand is to understand what the supply and demand curves are. The demand curve is the relationship between the price of a good or service and the quantity demanded of that good/service for a given time. As the price of goods increases, the demand for the product will, in most cases, decrease. To put it in more relatable terms, assume that the product in question are iPhones. If iPhones sell for $50, then more consumers will purchase them at a higher frequency. Essentially, because everyone can easily afford an iPhone, the demand for this product will remain high. On the other hand, if the price of an iPhone is $1000, the demand for the iPhone will decrease as the price of the iPhone is a lot less affordable. While most people would still like to buy the iPhone, the demand would be low because of the higher price. While this is an extreme example, the general concept is still the same.
The supply curve is different. While the demand curve is from the perspective of the consumers, the supply curve is from the perspective of the producers. When prices of a product increase, producers are willing to manufacture more of the product as they realize that there is an opportunity to make greater profits. On the flip side, if the price of a product drops it will depress production as there may be no profit from selling the product. We see the opposite of the demand curve, when the price is low the supply is low, and when the price is high the producer can make more of the product.
Balancing the Two
However, this poses a problem. Consumers typically look for the lowest cost, while producers are encouraged to increase outputs only at higher costs, so is there a way for both parties to be satisfied? Producers, logically, seek to sell their products for as much as possible. However, when prices become unreasonable, consumers will change their preferences and move away from the product. This is where equilibrium comes in. A proper balance must be achieved where both parties can engage in transactions that benefit consumers and producers. This point of equilibrium is where the lines of the demand and supply curves intersect, theoretically. At the equilibrium both the consumers and producers are satisfied equally, thus creating a stable market for the products.
The relationship between supply and demand is the foundation for all companies that sell consumer products. It is a significant part of most people’s lives, and by understanding it we can see the impact that it has on our lives!