Law Of Supply And Demand

AAA

DEFINITION of 'Law Of Supply And Demand'

A theory explaining the interaction between the supply of a resource and the demand for that resource. The law of supply and demand defines the effect that the availability of a particular product and the desire (or demand) for that product has on price. Generally, if there is a low supply and a high demand, the price will be high. In contrast, the greater the supply and the lower the demand, the lower the price will be.

INVESTOPEDIA EXPLAINS 'Law Of Supply And Demand'

The law of supply and demand is not an actual law but it is well confirmed and understood realization that if you have a lot of one item, the price for that item should go down. At the same time you need to understand the interaction; even if you have a high supply, if the demand is also high, the price could also be high. In the world of stock investing, the law of supply and demand can contribute to explaining a stocks price at any given time. It is the base to any economic understanding.

VIDEO

Loading the player...
RELATED TERMS
  1. Inelastic

    An economic term used to describe the situation in which the ...
  2. Underconsumption

    The purchase of goods and services at levels that fall below ...
  3. General Equilibrium Theory

    General equilibrium theory studies supply and demand fundamentals ...
  4. Economic Equilibrium

    A condition or state in which economic forces are balanced. These ...
  5. Theory Of Price

    An economic theory that contends that the price for any specific ...
  6. Pent Up Demand

    When the demand for a service or product is unusually strong. ...
RELATED FAQS
  1. Why are trends in rig count important to investors in the oil and gas sector?

    Trends in rig counts are important to investors in the oil and gas sector because they reveal the sector's supply dynamics. ... Read Full Answer >>
  2. Does Manchester United (MANU) own Old Trafford stadium?

    Old Trafford Stadium was built for and is currently still owned by Manchester United Football Club (Man Utd.). This means ... Read Full Answer >>
  3. Do all taxes create deadweight loss?

    Taxes create deadweight loss because they prevent people from buying a product that costs more after taxing than it would ... Read Full Answer >>
  4. How does price elasticity change in relation to supply and demand?

    The price elasticity of a product describes how sensitive suppliers and buyers are to changes in price. It doesn't change ... Read Full Answer >>
  5. What are some examples of positive correlation in economics?

    Positive correlation exists when two variables move in the same direction. A basic example of positive correlation is height ... Read Full Answer >>
  6. How does the balance of trade impact currency exchange rates?

    The balance of trade influences currency exchange rates through its effect on the supply and demand for foreign exchange. ... Read Full Answer >>
  7. Why is the assumption of Ceteris Paribus important in determining causation?

    In economics, the assumption of ceteris paribus, a Latin phrase that means "with other things the same" or "other things ... Read Full Answer >>
  8. How does the law of supply and demand affect the oil industry?

    The law of supply and demand primarily affects the oil industry by determining the price of oil. The price, and expectations ... Read Full Answer >>
  9. What seasonal trends exist in the metals and mining sector?

    There are strong seasonal tendencies in the metals and mining sector. The seasonality of the mining sector is primarily driven ... Read Full Answer >>
  10. How can you calculate diminishing marginal returns in Excel?

    As production capacity increases, the return gained per each new unit of capacity decreases after a certain point. This is ... Read Full Answer >>
  11. What are the most important aspects of a capitalist system?

    The most important aspects of a capitalist system are private property, private control of the factors of production, accumulation ... Read Full Answer >>
  12. How does the law of supply and demand affect the housing market?

    The law of supply and demand is a basic economic principle that explains the relationship between supply and demand for a ... Read Full Answer >>
  13. How does the law of supply and demand affect the stock market?

    The law of supply and demand affects the stock market by determining prices of the individual stocks that make up the market. The ... Read Full Answer >>
  14. What are some examples of inelastic goods and services that are not affected by the ...

    The laws of supply and demand affect all goods in the market. The degree to which prices respond to changes in supply and ... Read Full Answer >>
  15. How does the law of supply and demand affect prices?

    The law of supply and demand is an economic theory that explains how supply and demand are related to each other and how ... Read Full Answer >>
  16. What is the difference between a command economy and a mixed economy?

    A command economy and a mixed economy are two different economic systems. One system is controlled by the government, while ... Read Full Answer >>
  17. What are the advantages and disadvantages of a command economy?

    A command economy is one in which a centralized government controls the means of production. The government determines what ... Read Full Answer >>
  18. Why are stock buybacks so controversial?

    A stock buyback describes a situation in which a company repurchases shares of its own stock from the marketplace. Similar ... Read Full Answer >>
  19. Why do some people consider the law of demand to be a tautology?

    Some people consider the laws of supply and demand in economics to be tautological because they lack empirical rigor. They ... Read Full Answer >>
  20. What's the difference between regular supply and demand and aggregate supply and ...

    Supply and demand expresses a relationship between what producers supply and what consumers demand in economics. Aggregate ... Read Full Answer >>
  21. Is there an easy way to calculate the law of supply and demand for small business?

    Small businesses use the law of supply and demand the same way large corporations do. Supply refers to the amount of a product ... Read Full Answer >>
  22. Why does Berkshire Hathaway prefer to buy back shares instead of paying dividends?

    Methods by which companies reward shareholders with cash include paying dividends and buying back stock. One of the most ... Read Full Answer >>
  23. Who discovered the law of supply and demand?

    The law of supply and demand, which dictates that a product's availability and demand impacts its price, was noticed in the ... Read Full Answer >>
  24. Why do most economists favor capitalism?

    Capitalism is characterized by market production of the goods and services needed in an economy and the private ownership ... Read Full Answer >>
  25. What causes negative inflation or deflation?

      Deflation, or negative inflation, happens when prices fall because the supply of goods is higher than the demand for those ... Read Full Answer >>
Related Articles
  1. Economics

    What is Supply & Demand?

    The law of supply and demand is one of the most basic principles in economics. In simplest terms, the law of supply and demand states that when an item is scarce, but many people want it, the ...
  2. Economics

    The History Of Economic Thought

    Economics is a vital part of every day life. Discover the major players who shaped its development.
  3. Economics

    3 Ways To Tell If Your Stock Has Bottomed

    No one can call stock bottoms with absolute certainty, but there are some common trends that appear when stocks are about to hit bottom.
  4. Personal Finance

    Why We Splurge When Times Are Good

    The concept of elasticity of demand is part of every purchase you make. Find out how it works.
  5. Economics

    Calculating Income Elasticity of Demand

    Income elasticity of demand is a measure of how consumer demand changes when income changes.
  6. Economics

    Understanding Implicit Costs

    An implicit cost is any cost associated with not taking a certain action.
  7. Economics

    Understanding Diseconomies of Scale

    Diseconomies of scale is the point where a business no longer experiences decreasing costs per unit of output.
  8. Economics

    What Does Capital Intensive Mean?

    Capital intensive refers to a business or industry that requires a substantial amount of money or financial resources to engage in its specific business.
  9. Economics

    What is an Original Equipment Manufacturer (OEM)?

    An OEM is a company whose products are used as components in another company's product.
  10. Economics

    Good Economic News The Cynics May Be Missing

    Headline data about the U.S. economy hasn’t been great, but the economy is actually stronger than it’s getting credit for.

You May Also Like

Hot Definitions
  1. Radner Equilibrium

    A theory suggesting that if economic decision makers have unlimited computational capacity for choice among strategies, then ...
  2. Inbound Cash Flow

    Any currency that a company or individual receives through conducting a transaction with another party. Inbound cash flow ...
  3. Social Security

    A United States federal program of social insurance and benefits developed in 1935. The Social Security program's benefits ...
  4. American Dream

    The belief that anyone, regardless of where they were born or what class they were born into, can attain their own version ...
  5. Multicurrency Note Facility

    A credit facility that finances short- to medium-term Euro notes. Multicurrency note facilities are denominated in many currencies. ...
  6. National Currency

    The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!