What is supply and demand in business

supply and demand

The terms supply and demand are an economic pair of terms that make statements about the availability of services and goods. According to this, an offer is only available if there is a corresponding demand for the specific good or the specific service. Supply and demand have an impact on pricing.

In the following lesson you will learn everything about the economic terms supply and demand and what they mean. Finally, there are a few more exercises that you can use to deepen the knowledge you have learned.

English: supply and demand

Why are supply and demand important?

In economic practice, supply and demand are of great importance.

Because every market is characterized by two different groups:

On the one hand there are the manufacturing companies or service providers who offer or sell something. This group is known as the provider. In contrast, there is the group of people who are subsumed under the term of potential buyers. This group is called the demand.

demand and supply

One of the most fundamental principles of economics is the principle of supply and demand. Two different sub-principles characterize the pair of terms and determine that an offer of goods and services is only provided by the providers if there is a sufficiently high demand.

demand

Demand describes the behavior of potential buyers. The decisive factor here is how many goods or services the buyer acquires at a certain price. Basically, consumers buy cheaper products more often. The more expensive the good or service is offered, the fewer the product will be bought. The demand therefore falls as a result of a rising price.

An apple costs 50 cents in April 2019 in Frankfurt am Main. The demand is so great that 50,000 apples are always provided and consumed per week. The entrepreneurs raise the price per apple to € 1. From then on, consumer demand is falling. They only want 15,000 apples because some of the potential buyers decide to grow their own apples in the garden.

The so-called demand curve shows that demand falls when the price rises. Price and demand are therefore directly related.

offer

The second relevant principle for supply and demand is supply. The concept of supply describes the amount of goods or services that companies produce and offer at a certain price. The higher the demand, the more goods a company will provide in order to maximize profit. As the price rises, so does the amount on offer.

Farmer Joachim from Frankfurt am Main is an apple lover. Whether he will not only eat apples himself in the future depends on the existing demand. Unless nobody wants to pay money for an apple, they don't offer any. If consumers are willing to pay € 1 per apple, they would like to offer 100 apples.

At a retail price of € 2 per apple, even 200 pieces. The higher the selling price, the more apples farmer Joachim will bring onto the market. Eventually his chances of profit increase.

The market equilibrium

The market equilibrium price is closely related to supply and demand. In particular, the influence of individual actors is limited - it is rather the supply and demand in the entire market that determine the price of the products.

For this purpose, both the demand function and the supply function are formed. The intersection of the two functions then represents the so-called equilibrium price. Two further constellations are also conceivable in which supply and demand do not match.

  • Market price higher than equilibrium price: Supply> demand
  • Market price lower than equilibrium price: Demand> supply

Practice questions