Law of Supply and Demand

Enlarge Image Commerce and economics started with one very elementary economic unit - a market. The concept of market has not changed much, even after several centuries and several aspects of a market remain the same including the law of demand and supply. Definition of this law is not a single statement, but a concept pertaining three different dimensions. The three primary constituents of any market include, supply, demand and price.

• Supply is the measure of all commodities and goods that are sent to the market for sale. Now, a certain confusion over the stored goods exists. Some consider stored goods to be a part of supply, whereas some do not. In normal circumstances however, goods in storage are not deemed to be a part of supply as they are not actually out for sale.
• Demand is defined to be the willingness of consumers to buy a commodity, with certain financial backing.
• A price is basically, the consideration for which the transaction takes place. Price is basically the medium of exchange.

These elements are permanent constituents of any market, and in the absence of even a single one, the market would not function. Now, proceeding to the law.

Law of Supply and Demand: Explained

The law of demand and supply, though two different laws, tend to act within the same market. The common market mechanism goes as, the seller brings in the commodity into the market, a certain cost that includes production cost and a profit margin. The buyers in return buys the product. Now, the rule of thumb goes that the more the number of supplied units the less is the cost going to be. That is, if the supplied units exceed the demanded units then the price of the commodity drops. In the reverse case, the lesser the supplied units, the more is the cost going to be. That is when the supplied units are lesser than the demanded units the price is always going to be high. One must note that this is just a rule of thumb and there are several exceptions and assumptions to the rule. However, these two demand and supply forces are successful in establishing the market price of any commodity. This principle or rather rule of thumb is known as the law of equilibrium, and is applicable in almost all the markets in the world. The law of supply and the law of demand always act like extensions of the equilibrium.

As mentioned above, the supply and demand law are two different laws that tend to govern the market.

• The law of supply, governs the behavior of the supplier that is the behavior of the producer or the seller. The simple logic is that once the price of one commodity increases due to excess demand and low supply, the producer or the supplier tends to increase the supply of the same commodity with an intent to make good revenue at a high established price. In this process the price comes down due to the new increased supply.
• The second one is of course the law of demand and works in relation with the price. As per this law, the more the price of the commodity, the lesser is the demand. The less demand causes the supply to exceed demand. There are however exceptions.

The aforementioned principles and rules are observed more like rules of thumbs, that is, they are applicable, in almost all cases but not always. The perceptions, demand and supply and price always differ from case to case, and hence, demand and supply analysis of all markets is done.