Supply and demand are both very important to economic activity. Supply is the total amount of a particular good or service available at a given time to consumers. Demand is a representation of a consumer's desire to purchase goods and services; it acts as a measurement of a consumer's willingness to pay a price for a specific good or service. These two economic forces influence each other; they are both important for the economy because they impact the prices of consumer goods and services within an economy.

Supply and Demand Determine the Price of Goods

Consumers may exhaust the available supply of a good by purchasing a given good or service at a high volume. This leads to an increase in demand. As demand increases, the available supply also decreases. While an increased supply may satiate available demand at a set price, prices may fall if supply continues to grow. But if supply decreases, prices may increase. Supply and demand have an important relationship because together they determine the prices of most goods and services.

Key Takeaways

  • Supply and demand are both important for the economy because they impact the prices of consumer goods and services within an economy.
  • According to market economy theory, the relationship between supply and demand balances out at a point in the future; this point is called the equilibrium price.
  • Economists and companies analyze the relationship between supply and demand when making strategic product decisions.

According to the principles of a market economy, the relationship between supply and demand balances out at a point in the future. This point–at which supply is equal to demand–is called the equilibrium price. At the equilibrium point, the market price for a given good ensures that the quantity of goods supplied is equal to the number of goods demanded. At this point, prices are perfectly set to interest consumers to purchase goods; at the same time, ensuring that companies produce neither too much nor too little product. Both economists and companies analyze the relationship between supply and demand when making strategic product decisions. The assumption behind a market economy is that supply and demand are the best determinants for an economy's growth and health. 

Consumer Behavior Influences Demand

One way that companies or economists might analyze this relationship is to create graphs that chart the equilibrium price of certain goods and services in order to determine product development and their production schedule. Consumer behavior dictates which products are produced and sold because consumers create the demand that companies attempt to meet. As a result, companies may study consumer behavior in an attempt to understand the current demand and predict future demand. It is vital that companies maintain the capacity to produce enough of a good or service that they can satisfy consumer demands.

Supply and demand are two sides of the same coin. Generally, supply is how much of something you have. Demand is how of something people want. One way to develop a more precise relationship between the two is to consider the price of something. Generally when demand for a good goes up, so does the price. This is because when people really want something, they may be willing to pay more for it. A seller will raise the price of a good if they think they can still sell the good and it will potentially make them more profit. In the most basic sense, a seller knows that they can get more money for a product that is highly demanded. By tracking the price of a good, you can also track a good's supply and demand.