Demand and supply are fundamental concepts in economics that describe how buyers and sellers interact in a marketplace. Demand refers to the quantity of a good or service that consumers are willing and able to purchase at various prices, while supply indicates the quantity that producers are willing and able to sell at different price levels. Together, they determine the market price and the quantity of goods sold.
The interplay between demand and supply is crucial in establishing market equilibrium, where the quantity demanded equals the quantity supplied. When demand increases (shifts to the right), perhaps due to a rise in consumer income or a change in tastes, prices typically rise as consumers compete to purchase the limited quantity available. Conversely, when supply increases (shifts to the right), perhaps due to technological advancements or an increase in producer capacity, prices usually fall, pushing the quantity sold higher.
Consider the recent trends in the global oil market. When COVID-19 initially reduced travel and economic activity, demand for oil plummeted, leading to a significant drop in prices. In contrast, as economies reopened and demand surged, prices began to rise again. Likewise, the introduction of electric vehicles has influenced the demand for oil, showcasing shifts in consumer preferences and technological influences.
In the UK housing market, increased demand due to low interest rates and government incentives has led to rising prices. As housing supply attempts to catch up, the resulting interplay showcases both the demand-driven price increases and supply-side challenges faced by builders.
Understanding the principles of demand and supply equips students with the analytical tools necessary for evaluating market behaviour and economic trends. By recognising these dynamics, learners can better grasp the complexities of decision-making in various market structures and anticipate the consequences of changes in economic conditions.
