Meaning of law of supply and demand (what is it, concept and definition)

What is the Law of Supply and Demand:

The law of supply and demand, in economics, is a model that describes the way in which prices vary depending on the supply of a product or service and its demand by consumers in the market.

In this sense, supply would be the quantity of a product or service put up for sale in the market, while demand would be the quantity of that same product or service that people actually want to purchase.

Thus, supply and demand, in a free market system, interact with each other to define, spontaneously and without the intervention of external agents, the prices of goods or services and the quantities of these to be produced..

Some governments often manipulate supply and demand to influence the consumption of a good or to increase its demand. Examples of this are the high taxes on tobacco to inhibit its consumption, or the education subsidy to motivate the population.

Principles of the law of supply and demand

The law of supply and demand has three fundamental principles in itself:

• When demand exceeds supply, price increases, just as when supply exceeds demand, price decreases. An increase in price will decrease demand over time, and supply will increase. Conversely, a decrease in price will, sooner or later, increase demand and decrease supply. Price will itself seek to reach the point where demand equals supply.

This economic model postulates, then, that the price of a good is established considering the price of a good and its sales, and affirms that the market price will be established at a point of equilibrium in which, ideally, everything produced It will have been sold, with no unsatisfied demand.

Examples of the law of supply and demand

For example, if the price of rice is too low, and consumers demand more than what producers can put on the market, then there is a situation of scarcity, which will make consumers willing to pay more for the product..

Consequently, rice producers will raise prices until a level is reached at which consumers are unwilling to buy more if the price continues to rise.

Another illustrative example of how the law of supply and demand behaves would be the following: the price of rice is too high and consumers are not willing to pay it, so the tendency is, then, for the price to decrease until it reaches a level where consumers are willing to pay and everything that is produced can be sold.