Basic Economic Terms: Demand and Supply

What is Demand?

Demand means how much of a product or service people are ready and able to buy at different prices. It's not just wanting something, but also having the money to get it. For example, if you really want a new video game but don't have enough money, your want is not called 'demand' in economics.

• Law of Demand: This is a simple rule. If the price of something goes up, people will generally want to buy less of it. If the price goes down, people will want to buy more. Think about your favorite snack: if its price doubles, you might buy fewer packs. This relationship is inverse.

Factors Affecting Demand (Things that Change Demand)

Besides price, many things can change how much people want to buy:

• Income: If people earn more money, they can buy more things, so demand goes up. If they earn less, demand goes down.
• Tastes and Preferences: If a new fashion trend starts, the demand for those clothes goes up. If a food item becomes unpopular, its demand falls.
• Price of Related Goods:
  
  • Substitute Goods: These are things you can use instead of another (like tea and coffee). If the price of coffee goes up, people might buy more tea, so tea's demand increases.
  • Complementary Goods: These are things often used together (like cars and petrol). If the price of petrol goes up a lot, people might use cars less, so the demand for cars might fall.
• Expectations: If people expect the price of something to go up next week (like petrol), they might buy more of it today, increasing current demand.
• Population: More people mean more potential buyers, so total demand for many goods will increase.

What is Supply?

Supply means how much of a product or service sellers are ready and willing to sell at different prices. It’s about what producers can offer to the market.

• Law of Supply: This rule states that if the price of something goes up, sellers will want to sell more of it because they can make more profit. If the price goes down, sellers will want to sell less. For instance, if the price of tomatoes in the market rises, farmers might try to grow and sell more tomatoes. This relationship is direct.

Factors Affecting Supply (Things that Change Supply)

Apart from price, these things can change how much sellers offer:

• Cost of Production: If it costs more to make something (e.g., raw materials get expensive), sellers might produce less, reducing supply. If costs fall, supply goes up.
• Technology: Better technology can make production easier and cheaper, so sellers can produce more, increasing supply.
• Government Policies (Taxes & Subsidies): If the government puts a high tax on a product, sellers might supply less. If it gives a subsidy (financial help), sellers might supply more.
• Number of Sellers: If more companies start making mobile phones, the total supply of phones in the market will increase.
• Expectations: If sellers expect prices to rise in the future, they might hold back some stock today to sell later at a higher price, reducing current supply.

Market Equilibrium

When you go to a vegetable market, you see sellers and buyers. Sellers want to sell at a high price, and buyers want to buy at a low price. The market equilibrium is like a 'happy point' where the amount of a product that buyers want to buy (demand) is exactly equal to the amount that sellers want to sell (supply). At this point, the price is stable, and everyone is happy. If the price is too high, sellers have too much unsold stock. If the price is too low, buyers can't find enough to buy. The market naturally tries to reach this equilibrium price and quantity.