At its root, what supply and demand says is "if I have a lot of x, and you have a lot of y, we can trade x and y in a ratio we work out according to our respective needs of x and y and everyone will be better off -- we will have aquired a good which we value more in return for a good which we value less." Instead of trading goods, we can exchange money for goods, or services for goods, etcetera, etcetera. The law works whenever there is a scarcity of something which is in demand.

By examining supply and demand, one can theoretically find the most efficient use of the society's time and energy. Not neccessarily the best or most humane, but a pure system of supply and demand will always find the supply / price combination which puts the system in equilibrium -- the point at which supply at a certain price precisely equals demand.

For instance, let's say I sell pet chickens in a small town. I do a poll door-to-door, and find what people would be willing to pay for a chicken (thus finding the level of demand at certain prices), and create a table with that data; additionally, I figure out how many chickens I can afford to produce at certain prices (since I'd have to build more coops, hire more trucks to send chickens out, hire more chicken trainers to make sure the chickens are housebroken, etc). Here's that table:

flamingweasel's chicken monopoly:

|price | # demanded | # supplied |
| $1   |     100    |     10     | <-- (point 1)
| $5   |      80    |     20     |
| $9   |      60    |     30     |
| $13  |      40    |     40     | <-- (point 2)
| $17  |      20    |     50     |
| $21  |      10    |     60     |
| $25  |       1    |     70     | <-- (point 3)

  • Point 1: Supply < Demand - Well, I'd definitely sell all my chickens, but I'd only make $10. In a market with lots of competition, this may be all I can do (more on that later)

  • Point 2: Supply == Demand, or Equilibrium - Here is the ideal spot, the most efficient use of everyone's energy. I make $520, and the most people get the most goods at the best price for both of us. Once you move off this spot, the transaction is no longer perfectly efficient -- one party is giving up more than the other party is giving up.

  • Point 3: Supply > Demand - Bad place for a seller to be. I've invested a lot of money into producing a whole bunch of chickens, and must raise prices accordingly, but I can only sell 1 at this price. And since chickens aren't very easy to warehouse, this is a disasterous place for me to be.
Now, if there's competition (for example, from ChickenMart moving into my town and opening a store), it's a very different situation (remember, in the table "supply" means the farm can afford to supply this many at that price):

flamingweasel's chicken farm versus ChickenMart:

|price | # demanded | supplied by | supplied by |  total |
|      |            |   weasel    | ChickenMart | supply |
| $1   |     100    |     10      |      20     |   30   |
| $5   |      80    |     20      |      40     |   60   |
| $7   |      70    |     25      |      50     |   75   | <-- (near equilbrium)
| $9   |      60    |     30      |      60     |   90   |
| $13  |      40    |     40      |      80     |  120   |
| $17  |      20    |     50      |     100     |  150   |
| $21  |      10    |     60      |     120     |  180   |
| $25  |       1    |     70      |     140     |  210   |

Notice that now that there's competition in the market, there's a different equilibrium point. However, now that I've got a competitor, I have an interest in making my production more efficient -- if I can make more chickens at a certain price than ChickenMart can, then I can get more of the sales and make more money. The end result of competition would be each farm having the most efficient possible production (I can make more chickens for each dollar I invest), making prices lower (I can meet demand at $5 instead of $7 since my investments were lower) than in a monopoly situation.
I recently went against my better instincts and bought a cellular phone, mostly for emergencies.  It's a Nokia 3360.  Like any good product on the American market nowadays, it's customizable so I can express my conformist individuality by removing the standard faceplates and switching it with any of 15 or so replacements in various colors and designs.  If you want to show your patriotism, the red, white, and blue flag faceplate is for you.  Futuristic tones more up your alley?  Grab the shiny silver and green plates.  Feeling drab and depressed?  Gunmetal grey is for you.

These faceplates are made of plastic.  Not particularly special plastic, just plastic.  Plastic is cheap.  You can go to your local Home Depot and get just about any size and shape of raw plastic you'd like, within reason, for about two dollars.  

I wasn't too thrilled with the standard colors I found adorning my 3360 when it arrived in the mail, but I wasn't exactly losing any sleep over it.  A few days passed, and I happened to be in the mall running a few errands.  I stopped by the celphone store (actually one of the five celphone stores in the medium-sized mall), five dollar bill in hand, figuring I'd swap covers.

Suggested Retail Price: $24.99 (plus tax)

I was actually stunned into silence.  Words failed me.  The poor girl behind the counter looked at me strangly as I reeled away from the store and found a place to sit down so I could regain some semblance of my internal calm and rethink my stance on the merits of capitalism.

Twenty-four dollars and ninety-nine cents (plus tax!) for two pieces of molded plastic perhaps worth seventy-five cents.

This is not a brand-new product.  This is not an experimental price.  Careful market research has led the executives at Nokia to estimate the maximum price the average consumer is willing to pay for these faceplates at exactly twenty-four dollars and ninety-nine cents (plus tax!), and the fact that retail stores continue to sell them at this price shows us that their research is absolutely correct.  This is supply and demand.  This is capitalism.  This is the 21st century, in the land of the free and the home of the brave.

Weep for the future.

Weep for us all.

The relationship between supply and demand is often expressed graphically.

Basic Facts

The y axis (vertical) represents the PRICE of the product/service.
The x axis (horizontal) represents the QUANTITY of the product or service.

The DEMAND CURVE slopes downward (high on the left, low on the right.
The SUPPLY CURVE slopes upward (low on the left, high on the right.

The point where the supply curve and the demand curve meet is called the EQUILIBRIUM point. Using flamingweasel's chicken monopoly from above as an example, point 2, where the price is 13$ and the quantity supplied is 40 chickens, is the equilibrium point for that market.

The point where the demand curve meets the vertical axis (price) is the point at which the price is too high for any of the product to be sold. Back to flamingweasel's chicken monopoly, if he tried to sell his chickens for $28 a piece, the demand for his chickens would go to 0 because no one would buy a chicken from him for that much.

The point where the demand curve meets the horizontal axis (quantity) is the amount of the product that people would want if it was free. If flamingweasel was giving away his chickens, the town still wouldn't want more than 150 of them.


Factors in the economy can make the supply and demand curves shift. The supply curve shifts left and right along the horizonal quantity axis. The demand curve shifts up and down along the vertical price axis.

Demand curve shifts:

  • Changes in Income: If everyone in the town gets a pay raise, and now all have 100 extra dollars to spend, they might be more willing to pay a higher price for chickens, causing the demand curve to shift upward. The inverse is true as well.
  • Availability of Substitutes: at this point, flamingweasel is the only person in town selling chickens. But if his neighboor starts selling turkeys for half of what flamingweasel is selling his chickens for, the people might decided that turkey is just as good as chicken, and buy the turkeys instead. This would cause the demand curve for chickens to shift downward.
  • Changing Tastes and Preferences: If the most respected doctor in the town is quoted in the news as saying "We have proven that eating chicken will make you bald and fat, but turkey is really great for you." peoples tastes are going to shift from chicken to turkey, causing the demand curve for chicken to shift down.
  • Expectations: If flamingweasel announces that he will only have chickens for one more week and then he won't have any for the rest of the year, people will expect to not be able to buy chickens for a while, so they will buy more while they are available, causing the demand curve to shift upward. (the demand for gasoline is highly effected by expectations)

Supply curve shifts:

  • Number of Sellers: if someone else starts selling chickens, then there is a larger supply of chickens and the supply curve shifts to the right.
  • Technology: if flamingweasel gets ahold of some way to make chicken eggs hatch faster, he can produce more chickens, causeing the supply curve to shift right.
  • Expectations: if flamingweasel expects that people will be willing to pay more for chickens next month, he may withold some of the chickens he currently has so he can sell them for the higher price later. This would cause the supply curve to shift to the left.
  • Price of Other Goods: if flamingweasel also raises pigs, and the price of pigs goes up, he will allocate more of his resources to raising pigs instead of chickens, causing the supply curve for chickens to shift to the left.

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