Supply and Demand

Supply and Demand May 3, 2011

What is Supply and Demand?

We’ve all heard the terms supply and demand. They sound simple enough, but there is one big distinction to make when referring to this overused phrase. Supply and demand are different than quantity supplied and quantity demanded.

Here’s why:

Supply is a measure of the availability of goods and services at all prices. Supply is affected by the cost of inputs, advances in technology, and other determinants of production. The quantity supplied depends on the price of the good or service. Naturally, producers are willing to supply more at higher prices and will want to lower the quantity supplied if prices have lowered.

Demand is a measure of the actual demand (the desire) for certain goods or services. If a person is willing and able to buy the service, there is demand for it. The quantity demanded is based on the price of the good. The demand of a good or service can change based on the following factors:

Factors That Affect Demand

(not quantity demanded)

  • Consumer Income
  • Prices of Substitutes and Compliments
  • Number of Buyers
  • Tastes and Preferences
  • Future Expectations of Prices

Factors That Affect Supply

(not quantity supplied)

  • Technology
  • Costs of Materials (Inputs)
  • Number of Suppliers
  • Price of Substitute Products
  • Price of Joint Products
  • Future Price Expectations

Remember, price is the biggest determinant of quantity supplied and demanded. The factors listed above are what cause changes or shifts in the actual supply and demand of goods and services.

Was this new information to you or just a reminder of some basic economics you learned back in school?


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