The ‘Law of Supply and Demand’, or simply Supply and Demand is a world-recognised economic model which determines the price any item will sell at.
To understand the model, we should first think about ‘Supply’, and then consider ‘Demand’; before putting the two concepts together.
In simple terms:
- Supply is the amount of something that providers are willing to bring to the market (i.e. supply) at a given price.
- Demand is the amount of something that consumers want to buy (or demand) at a given price. 
So what is Supply and Demand? This is an economic model where the price at which a good (a product or service) is sold is controlled by the good’s level of supply, and its demand. If the supply of a good is equal to its demand, there is an economic equilibrium, and the good is sold at a stable price which buyers and sellers are happy with.
However, Supply and Demand can (and often does) fluctuate. When the supply of a good is greater than the demand for that good, there is a surplus. On the other hand, when demand for a good is greater than the supply, then there is a shortage. In January 2017, for instance, there was a shortage of courgettes in the UK due to bad weather across Europe . This resulted in either no supply available to many supermarkets or, where supply was possible, the price rose from £6 or £7 per box to £20 per box. In another example, at the end of 2018, house prices in New Zealand were forecast to jump to record highs because of a housing shortage (with demand greater than supply). By contrast, fishermen (and women) in Northern Australia experienced a sharp drop in the price of barramundi fish in 2018, due to a surplus caused by farmed and imported fish entering the market to compete with their local wild-caught fish. This may have been wonderful for customers, but think about the impact on the sellers!
Can you think of any examples of shortages or surpluses in your region?
Answer the following questions.
- If supply decreases, prices will
- Try again. Think about the courgette example above.
- stay the same.
- Incorrect. Think about the courgette example above.
- That’s right.
- Equilibrium price is where the quantity of a good demanded by buyers equals the quantity producers are willing to supply.
- That’s right.
- Think about the meaning of the word ‘equilibrium’ in other contexts. Does that help?
- If there is a surplus of a good, a supplier is likely to:
- increase prices.
- Incorrect. Higher prices would make it hard for this supplier to compete with others.
- keep prices the same.
- Incorrect. Keeping prices at the same level may make it hard for this supplier to compete with others, if they are reducing their prices.
- reduce prices.
- Correct. Reducing prices may help to increase sales.
- increase prices.
- In your learning journal blog, write a short reflection (200-250 words) on what you have learned about supply and demand, and why it is important for entrepreneurs to consider. For example, are small companies more likely than larger businesses to be challenged by changes in market supply and/or demand? Why/why not? What do you think the supply and demand position is for your own planned business product or service? Why?
- Remember to tag or label your post using the course code: IENT103 (This is needed to harvest a link to your blog post in the course feed.)