Economics Basics: Supply and Demand

Economics Basics: Supply and Demand
By Reem Heakal
Supply and demand is perhaps one of the most fundamental concepts of economics and it is the backbone of a market economy. Demand refers to how much (quantity) of a product or service is desired by buyers. The quantity demanded is the amount of a product people are willing to buy at a certain price; the relationship between price and quantity demanded is known as the demand relationship. Supply represents how much the market can offer. The quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price. The correlation between price and how much of a good or service is supplied to the market is known as the supply relationship. Price, therefore, is a reflection of supply and demand.


The relationship between demand and supply underlie the forces behind the allocation of resources. In market economy theories, demand and supply theory will allocate resources in the most efficient way possible. How? Let us take a closer look at the law of demand and the law of supply.

A. The Law of Demand

The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will demand that good. In other words, the higher the price, the lower the quantity demanded. The amount of a good that buyers purchase at a higher price is less because as the price of a good goes up, so does the opportunity cost of buying that good. As a result, people will naturally avoid buying a product that will force them to forgo the consumption of something else they value more. The chart below shows that the curve is a downward slope.




A, B and C are points on the demand curve. Each point on the curve reflects a direct correlation between quantity demanded (Q) and price (P). So, at point A, the quantity demanded will be Q1 and the price will be P1, and so on. The demand relationship curve illustrates the negative relationship between price and quantity demanded. The higher the price of a good the lower the quantity demanded (A), and the lower the price, the more the good will be in demand (C).

B. The Law of Supply

Like the law of demand, the law of supply demonstrates the quantities that will be sold at a certain price. But unlike the law of demand, the supply relationship shows an upward slope. This means that the higher the price, the higher the quantity supplied. Producers supply more at a higher price because selling a higher quantity at a higher price increases revenue.




A, B and C are points on the supply curve. Each point on the curve reflects a direct correlation between quantity supplied (Q) and price (P). At point B, the quantity supplied will be Q2 and the price will be P2, and so on. (To learn how economic factors are used in currency trading, read Forex Walkthrough: Economics.)

Time and Supply

Unlike the demand relationship, however, the supply relationship is a factor of time. Time is important to supply because suppliers must, but cannot always, react quickly to a change in demand or price. So it is important to try and determine whether a price change that is caused by demand will be temporary or permanent.


Let's say there's a sudden increase in the demand and price for umbrellas in an unexpected rainy season; suppliers may simply accommodate demand by using their production equipment more intensively. If, however, there is a climate change, and the population will need umbrellas year-round, the change in demand and price will be expected to be long term; suppliers will have to change their equipment and production facilities in order to meet the long-term levels of demand.

C. Supply and Demand Relationship

Now that we know the laws of supply and demand, let's turn to an example to show how supply and demand affect price.


Imagine that a special edition CD of your favorite band is released for $20. Because the record company's previous analysis showed that consumers will not demand CDs at a price higher than $20, only ten CDs were released because the opportunity cost is too high for suppliers to produce more. If, however, the ten CDs are demanded by 20 people, the price will subsequently rise because, according to the demand relationship, as demand increases, so does the price. Consequently, the rise in price should prompt more CDs to be supplied as the supply relationship shows that the higher the price, the higher the quantity supplied.



If, however, there are 30 CDs produced and demand is still at 20, the price will not be pushed up because the supply more than accommodates demand. In fact after the 20 consumers have been satisfied with their CD purchases, the price of the leftover CDs may drop as CD producers attempt to sell the remaining ten CDs. The lower price will then make the CD more available to people who had previously decided that the opportunity cost of buying the CD at $20 was too high.

D. Equilibrium

When supply and demand are equal (i.e. when the supply function and demand function intersect) the economy is said to be at equilibrium. At this point, the allocation of goods is at its most efficient because the amount of goods being supplied is exactly the same as the amount of goods being demanded. Thus, everyone (individuals, firms, or countries) is satisfied with the current economic condition. At the given price, suppliers are selling all the goods that they have produced and consumers are getting all the goods that they are demanding.




As you can see on the chart, equilibrium occurs at the intersection of the demand and supply curve, which indicates no allocative inefficiency. At this point, the price of the goods will be P* and the quantity will be Q*. These figures are referred to as equilibrium price and quantity.


In the real market place equilibrium can only ever be reached in theory, so the prices of goods and services are constantly changing in relation to fluctuations in demand and supply.

E. Disequilibrium


Disequilibrium occurs whenever the price or quantity is not equal to P* or Q*.


1. Excess Supply

If the price is set too high, excess supply will be created within the economy and there will be allocative inefficiency.




At price P1 the quantity of goods that the producers wish to supply is indicated by Q2. At P1, however, the quantity that the consumers want to consume is at Q1, a quantity much less than Q2. Because Q2 is greater than Q1, too much is being produced and too little is being consumed. The suppliers are trying to produce more goods, which they hope to sell to increase profits, but those consuming the goods will find the product less attractive and purchase less because the price is too high.


2. Excess Demand

Excess demand is created when price is set below the equilibrium price. Because the price is so low, too many consumers want the good while producers are not making enough of it.




In this situation, at price P1, the quantity of goods demanded by consumers at this price is Q2. Conversely, the quantity of goods that producers are willing to produce at this price is Q1. Thus, there are too few goods being produced to satisfy the wants (demand) of the consumers. However, as consumers have to compete with one other to buy the good at this price, the demand will push the price up, making suppliers want to supply more and bringing the price closer to its equilibrium.

F. Shifts vs. Movement

For economics, the "movements" and "shifts" in relation to the supply and demand curves represent very different market phenomena:


1. Movements

A movement refers to a change along a curve. On the demand curve, a movement denotes a change in both price and quantity demanded from one point to another on the curve. The movement implies that the demand relationship remains consistent. Therefore, a movement along the demand curve will occur when the price of the good changes and the quantity demanded changes in accordance to the original demand relationship. In other words, a movement occurs when a change in the quantity demanded is caused only by a change in price, and vice versa.




Like a movement along the demand curve, a movement along the supply curve means that the supply relationship remains consistent. Therefore, a movement along the supply curve will occur when the price of the good changes and the quantity supplied changes in accordance to the original supply relationship. In other words, a movement occurs when a change in quantity supplied is caused only by a change in price, and vice versa.




2. Shifts

A shift in a demand or supply curve occurs when a good's quantity demanded or supplied changes even though price remains the same. For instance, if the price for a bottle of beer was $2 and the quantity of beer demanded increased from Q1 to Q2, then there would be a shift in the demand for beer. Shifts in the demand curve imply that the original demand relationship has changed, meaning that quantity demand is affected by a factor other than price. A shift in the demand relationship would occur if, for instance, beer suddenly became the only type of alcohol available for consumption.




Conversely, if the price for a bottle of beer was $2 and the quantity supplied decreased from Q1 to Q2, then there would be a shift in the supply of beer. Like a shift in the demand curve, a shift in the supply curve implies that the original supply curve has changed, meaning that the quantity supplied is effected by a factor other than price. A shift in the supply curve would occur if, for instance, a natural disaster caused a mass shortage of hops; beer manufacturers would be forced to supply less beer for the same price.

Hasil (Bahasa Indonesia) 1:

Dasar-dasar ekonomi: Penawaran dan permintaanOleh Reem HeakalPenawaran dan permintaan adalah mungkin salah satu konsep paling mendasar ekonomi dan itu adalah tulang punggung dari ekonomi pasar. Permintaan mengacu pada berapa banyak (kuantitas) dari produk atau layanan yang diinginkan oleh pembeli. Kuantitas menuntut adalah jumlah produk yang orang-orang bersedia untuk membeli pada harga tertentu; hubungan antara harga dan kuantitas yang menuntut dikenal sebagai hubungan permintaan. Pasokan mewakili berapa banyak pasar dapat menawarkan. Kuantitas yang ditawarkan mengacu pada jumlah yang baik tertentu produsen bersedia untuk memasok saat menerima harga tertentu. Korelasi antara harga dan berapa banyak yang baik atau Layanan disediakan untuk pasar dikenal sebagai hubungan pasokan. Harga, oleh karena itu, adalah refleksi dari penawaran dan permintaan. Hubungan antara permintaan dan persediaan mendasari kekuatan di belakang alokasi sumber daya. Dalam teori ekonomi pasar, teori permintaan dan persediaan akan mengalokasikan sumber daya dalam cara yang paling efisien mungkin. Bagaimana? Mari kita lihat lebih dekat di hukum permintaan dan hukum pasokan.A. hukum permintaan Hukum permintaan menyatakan bahwa, jika faktor-faktor lain tetap sama, semakin tinggi harga yang baik, semakin sedikit orang akan menuntut yang baik. Dengan kata lain, semakin tinggi harga, semakin rendah kuantitas menuntut. Jumlah yang baik yang pembeli beli di harga yang lebih tinggi yang kurang karena sebagai harga baik naik, begitu pula kesempatan biaya untuk membeli yang baik. Akibatnya, orang-orang secara alami akan menghindari membeli produk yang akan memaksa mereka untuk melupakan konsumsi sesuatu yang lain mereka nilai lebih. Tabel di bawah menunjukkan bahwa kurva kemiringan ke bawah. A, B dan C adalah poin pada kurva permintaan. Setiap titik pada kurva mencerminkan korelasi langsung antara jumlah permintaan (Q) dan harga (P). Jadi, pada titik A, kuantitas menuntut akan Q1 dan harga akan menjadi P1, dan sebagainya. Kurva permintaan hubungan menggambarkan hubungan negatif antara harga dan kuantitas yang menuntut. Semakin tinggi harga yang baik semakin rendah jumlah yang menuntut (A), dan semakin rendah harga, lebih baik akan berada dalam permintaan (C).B. hukum pasokan Seperti hukum permintaan, hukum pasokan menunjukkan jumlah yang akan dijual pada harga tertentu. Tapi tidak seperti hukum permintaan, hubungan pasokan menunjukkan ke atas lereng. Ini berarti bahwa semakin tinggi harga, semakin tinggi jumlah yang disediakan. Supply produsen lain dengan harga yang lebih tinggi karena menjual kuantitas lebih tinggi dengan harga yang lebih tinggi meningkatkan pendapatan. A, B dan C adalah poin pada kurva pasokan. Setiap titik pada kurva mencerminkan korelasi langsung antara kuantitas yang ditawarkan (Q) dan harga (P). Di titik B, kuantitas yang ditawarkan akan Q2 dan harga akan menjadi P2, dan sebagainya. (Untuk mempelajari bagaimana ekonomi faktor yang digunakan dalam perdagangan mata uang, membaca panduan Forex: ekonomi.)Waktu dan pasokan Tidak seperti hubungan permintaan, namun, hubungan pasokan adalah faktor waktu. Waktu penting untuk memasok karena pemasok harus, tapi tidak selalu, bereaksi dengan cepat untuk perubahan permintaan atau harga. Jadi penting untuk mencoba dan menentukan apakah perubahan harga yang disebabkan oleh permintaan akan sementara atau permanen. Katakanlah ada peningkatan mendadak dalam permintaan dan harga untuk payung di musim hujan yang tak terduga; pemasok hanya dapat mengakomodasi permintaan dengan menggunakan peralatan produksi mereka lebih intensif. Jika, namun, ada perubahan iklim, dan penduduk akan perlu payung sepanjang tahun, perubahan permintaan dan harga akan diharapkan untuk jangka panjang; pemasok harus mengubah mereka peralatan dan fasilitas produksi untuk memenuhi tingkat permintaan jangka panjang.C. permintaan dan hubungan Sekarang bahwa kita tahu hukum penawaran dan permintaan, mari kita beralih ke sebuah contoh untuk menunjukkan bagaimana permintaan dan mempengaruhi harga. Bayangkan bahwa CD edisi khusus band favorit Anda dilepaskan untuk $20. Karena perusahaan rekaman sebelumnya analisis menunjukkan bahwa konsumen tidak akan menuntut CD pada harga yang lebih tinggi dari $20, CD hanya sepuluh dibebaskan karena biaya kesempatan terlalu tinggi untuk pemasok untuk menghasilkan lebih banyak. Jika, namun, CD sepuluh dituntut oleh 20 orang, harga akan kemudian meningkat karena, menurut permintaan hubungan, permintaan meningkat, begitu juga harga. Akibatnya, kenaikan harga harus meminta lebih CD akan diberikan sebagai hubungan pasokan menunjukkan bahwa semakin tinggi harga, semakin tinggi kuantitas yang ditawarkan. Jika, namun, ada 30 CD diproduksi dan permintaan yang masih di 20, harga akan tidak akan mendorong karena pasokan lebih mengakomodasi permintaan. Bahkan setelah 20 konsumen telah puas dengan pembelian CD mereka, harga CD sisa mungkin turun sebagai CD produsen berusaha menjual CD sepuluh tersisa. Harga yang lebih rendah maka akan membuat CD lebih tersedia untuk orang-orang yang sebelumnya telah memutuskan bahwa biaya kesempatan membeli CD $ 20 adalah terlalu tinggi.D. kesetimbangan Ketika Penawaran dan permintaan sama (yakni ketika fungsi pasokan dan permintaan fungsi berpotongan) ekonomi dikatakan keseimbangan. Pada titik ini, alokasi barang adalah pada yang paling efisien karena jumlah barang yang disediakan adalah persis sama dengan jumlah barang yang dituntut. Dengan demikian, setiap orang (individu, perusahaan, atau negara) puas dengan kondisi ekonomi saat ini. Pada harga tertentu, pemasok menjual barang-barang yang mereka telah menghasilkan dan konsumen mendapatkan barang-barang yang mereka menuntut. Seperti yang Anda lihat pada tabel, keseimbangan terjadi di persimpangan kurva permintaan dan penawaran, yang menunjukkan tidak ada inefisiensi alokasi. Pada titik ini, harga barang akan P * dan kuantitas akan Q *. Angka-angka ini dirujuk sebagai keseimbangan harga dan kuantitas. Di pasar nyata keseimbangan dapat hanya pernah dicapai dalam teori, sehingga harga barang dan jasa yang terus berubah dalam kaitannya dengan fluktuasi permintaan dan penawaran.E. ketidakseimbangan Ketidakseimbangan ini terjadi setiap kali harga atau jumlah yang tidak sama dengan P * atau Q *. 1. kelebihan pasokan Jika harga diatur terlalu tinggi, kelebihan pasokan akan dibuat dalam ekonomi dan akan ada alokasi inefisiensi. At price P1 the quantity of goods that the producers wish to supply is indicated by Q2. At P1, however, the quantity that the consumers want to consume is at Q1, a quantity much less than Q2. Because Q2 is greater than Q1, too much is being produced and too little is being consumed. The suppliers are trying to produce more goods, which they hope to sell to increase profits, but those consuming the goods will find the product less attractive and purchase less because the price is too high. 2. Excess Demand Excess demand is created when price is set below the equilibrium price. Because the price is so low, too many consumers want the good while producers are not making enough of it. In this situation, at price P1, the quantity of goods demanded by consumers at this price is Q2. Conversely, the quantity of goods that producers are willing to produce at this price is Q1. Thus, there are too few goods being produced to satisfy the wants (demand) of the consumers. However, as consumers have to compete with one other to buy the good at this price, the demand will push the price up, making suppliers want to supply more and bringing the price closer to its equilibrium.F. Shifts vs. Movement For economics, the "movements" and "shifts" in relation to the supply and demand curves represent very different market phenomena: 1. Movements A movement refers to a change along a curve. On the demand curve, a movement denotes a change in both price and quantity demanded from one point to another on the curve. The movement implies that the demand relationship remains consistent. Therefore, a movement along the demand curve will occur when the price of the good changes and the quantity demanded changes in accordance to the original demand relationship. In other words, a movement occurs when a change in the quantity demanded is caused only by a change in price, and vice versa. Like a movement along the demand curve, a movement along the supply curve means that the supply relationship remains consistent. Therefore, a movement along the supply curve will occur when the price of the good changes and the quantity supplied changes in accordance to the original supply relationship. In other words, a movement occurs when a change in quantity supplied is caused only by a change in price, and vice versa. 2. Shifts A shift in a demand or supply curve occurs when a good's quantity demanded or supplied changes even though price remains the same. For instance, if the price for a bottle of beer was $2 and the quantity of beer demanded increased from Q1 to Q2, then there would be a shift in the demand for beer. Shifts in the demand curve imply that the original demand relationship has changed, meaning that quantity demand is affected by a factor other than price. A shift in the demand relationship would occur if, for instance, beer suddenly became the only type of alcohol available for consumption. Conversely, if the price for a bottle of beer was $2 and the quantity supplied decreased from Q1 to Q2, then there would be a shift in the supply of beer. Like a shift in the demand curve, a shift in the supply curve implies that the original supply curve has changed, meaning that the quantity supplied is effected by a factor other than price. A shift in the supply curve would occur if, for instance, a natural disaster caused a mass shortage of hops; beer manufacturers would be forced to supply less beer for the same price.