Supply and demand is the most fundamental concept in economics. It explains how prices are determined in a market and why they change.

What Is Demand?

Demand is the quantity of a good that consumers are willing and able to buy at various prices. The Law of Demand states: as price increases, quantity demanded decreases (and vice versa), all else being equal.

What Is Supply?

Supply is the quantity of a good that producers are willing to sell at various prices. The Law of Supply states: as price increases, quantity supplied increases.

Market Equilibrium

Where the supply curve and demand curve intersect is the equilibrium price — the price at which the quantity demanded equals the quantity supplied. At this price, the market clears: there’s no surplus and no shortage.

What Shifts Demand?

• Income changes — Higher income increases demand for normal goods
• Tastes & preferences — Trends, advertising, health awareness
• Price of related goods — Substitutes and complements
• Population — More people = more demand
• Expectations — Expected future prices affect current buying

What Shifts Supply?

• Input costs — Wages, raw materials, energy
• Technology — Better tech reduces production costs
• Government policy — Taxes, subsidies, regulations
• Number of sellers — More sellers = more supply

Real-World Example

When COVID-19 disrupted semiconductor supply chains, chip supply plummeted while demand surged (everyone working from home needed laptops). Result? Prices spiked, car manufacturers couldn’t get chips, and new cars became scarce. This is supply and demand in action.