A:

Supply and demand are both key to economic activity. The two influence each other and impact prices of consumer goods and services within an economy. Supply is the amount of a particular good or service available at a given time to consumers. Consumers, expressing interest in purchasing a good or service, exhaust available supply, generally resulting in an increase in demand.

Demand is a measurement of consumer desire and consumer spending on a particular good or service at a specific price. As demand increases, available supply decreases and an increased supply may satiate available demand at that price. Prices may fall if supply continues to grow. If supply decreases, prices may continue to increase. Supply and demand have an important relationship that determines the prices of most goods and services. Many companies analyze this market relationship while making strategic production decisions.

Market economy theories claim that, over time, this relationship balances out in an equilibrium of prices, with supply and demand reaching a close approximation of the perfect allocation of resources to production. At this point, prices are perfectly set to interest consumers and companies produce neither too much nor too little product. Market economies use this to determine product development and production.

Consumers, then, dictate which products are produced and sold by creating the demand for companies to supply with goods and services. Companies study consumer behavior in an attempt to understand current and future demand. The capacity to produce enough supply to meet demand keeps prices low enough to entice consumers. In this sense, both supply and demand are equally important to economic vitality. (For related reading, see: Introduction to Supply and Demand.)

RELATED FAQS
  1. Do supply and demand always cancel each other out?

    Learn more about supply and demand and how these factors drive economic activity. Find out more about demand elasticity and ... Read Answer >>
  2. How Does the Law of Supply and Demand Affect Prices?

    Learn how the law of supply and demand affects prices. Read Answer >>
  3. How does the law of supply and demand affect the stock market?

    Find out how the law of supply and demand affects the stock market, and how it determines the prices of individual stocks ... Read Answer >>
  4. What are some examples of positive correlation in economics?

    Learn the most common examples of positive correlation in macroeconomics and microeconomics, including demand and price, ... Read Answer >>
  5. How does aggregate demand affect price level?

    Read about the relationship between aggregate demand and the general price level, and learn why it is difficult to determine ... Read Answer >>
  6. What types of consumer goods demonstrate the price elasticity of supply?

    Find out how to gauge the price elasticity of supply for consumer goods, and read about a few examples of goods that have ... Read Answer >>
Related Articles
  1. Insights

    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. Investing

    Why You Can't Influence Gas Prices

    Don't believe the water-cooler talk. Big oil companies aren't to blame for high prices.
  3. Investing

    How Long Can Gas Stay Cheap?

    The current gas prices means a lot for the economy and our pockets. Let's explore how long we can expect gas prices to be low, what affects gas prices, and what changes might be in store.
  4. Investing

    Leading Economic Indicators for Oil Prices

    The factors that determine the price of oil are supply and demand. Their leading indicators can help investors and traders forecast future price movements.
  5. Insights

    Cost-Push Inflation Versus Demand-Pull Inflation

    Gain a deeper understanding of aggregate supply and demand, forces which raise the price of goods and services.
  6. Insights

    Do Deflationary Shocks Help Or Hurt The Economy?

    Find out how deflationary shocks can both benefit and hurt consumers and businesses.
  7. Investing

    What Determines Gas Prices?

    Gas prices are influenced by more than supply and demand. Find out what determines the price you pay at the pump.
  8. Insights

    The Dangers Of Deflation

    We look at what life would be like in a deflationary environment, and what you can do to protect your investments.
RELATED TERMS
  1. Law of Supply and Demand

    The law of supply and demand explains the interaction between ...
  2. Supply

    Supply is a fundamental economic concept that describes the total ...
  3. Demand

    An economic principle that describes a consumer's desire and ...
  4. Change In Supply

    A term used in economics to describe when the suppliers of a ...
  5. Quantity Supplied

    A term used in economics to describe the amount of goods or services ...
  6. Labor Market

    The labor market refers to the supply and demand for labor, in ...
Hot Definitions
  1. Consumer Price Index - CPI

    A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, ...
  2. Moving Average - MA

    A moving average (MA) is a widely used indicator in technical analysis that helps smooth out price action by filtering out ...
  3. Stop Order

    A stop order is an order to buy or sell a security when its price increases past a particular point in order to limit losses ...
  4. Inflation

    The rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of ...
  5. Candlestick

    A chart that displays the high, low, opening and closing prices for a security for a single day. The wide part of the candlestick ...
  6. Indicator

    Indicators are statistics used to measure current conditions as well as to forecast financial or economic trends.
Trading Center