What Is the Law of Supply and Demand?

The law of supply and demand is a theory that explains the interaction between the sellers of a resource and the buyers for that resource.....

The theory defines what effect the relationship between the price of the product the willingness people to either buy or sell the product. Generally, as price increases people are willing to supply more and demand less and vice versa when the price falls. 

 

The law of supply and demand, one of the most basic economic laws, ties into almost all economic principles in some way. In practice, people's willingness to supply and demand a good determines the market equilibrium price, or the price where the quantity of the good that people are willing to supply just equals the quantity that people demand. However, multiple factors can affect both supply and demand, causing them to increase or decrease in various ways.
 

Law of Demand vs. Law of Supply

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.

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. From the seller's perspective, the opportunity cost of each additional unit that they sell tends to be higher and higher. Producers supply more at a higher price because the higher selling price justifies the higher opportunity cost of each additional unit sold.

For both supply and demand, it is important to understand that time is always a dimension. on these charts. The quantity demanded or supplied, found along the horizontal access is always measured in units of the good over a given time interval. Longer or shorter time intervals can influence the shapes of both the supply and demand curves.

At any given point in time, the supply of a good brought to market is fixed. In other words the supply curve in this case is a vertical line, while the demand curve is always downward sloping due to the law of diminishing marginal utility. Sellers can charge no more than the market will bear based on consumer demand at that point in time. Over longer intervals of time however, suppliers can increase or decrease the quantity they supply to the market based on the price they expect to be able to charge. So over time the supply curve slopes upward; the more suppliers expect to be able to charge, the more they will be willing to produce and bring to market.

For all time periods, the demand curve slopes downward because of the law of diminishing marginal utility. The first unit of good that any buyer demands will always be put to that buyers highest valued use. For each additional unit, the buyer will use it (or plan to use it) for a successively lower valued use.
 

Shifts vs. Movement

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

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.

Meanwhile, 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.