Introduction to entrepreneurship/IENT103/Economics/Supply

The 'Law of Supply and Demand', or simply Supply and Demand is a world-recognised economic model which determines the price any item will sell at.

To understand the model, we should first think about 'Supply', and then consider 'Demand'; before putting the two concepts together.

In simple terms:

• Supply is the amount of something that providers are willing to bring to the market (i.e. supply) at a given price.
• Demand is the amount of something that consumers want to buy (or demand) at a given price.

So what is Supply and Demand? This is an economic model where the price at which a good (a product or service) is sold is controlled by the good’s level of supply, and its demand. If the supply of a good is equal to its demand, there is an economic equilibrium, and the good is sold at a stable price which buyers and sellers are happy with.

However, Supply and Demand can (and often does) fluctuate. When the supply of a good is greater than the demand for that good, there is a surplus. On the other hand, when demand for a good is greater than the supply, then there is a shortage. In January 2017, for instance, there was a shortage of courgettes in the UK due to bad weather across Europe . This resulted in either no supply available to many supermarkets or, where supply was possible, the price rose from £6 or £7 per box to £20 per box. In another example, there is a housing shortage in New Zealand (so demand is greater than supply), and this is forcing the house prices to jump to record highs . Can you think of any examples of shortages or surpluses in your region?

Required reading

There are multiple factors that affect Supply and Demand. To explore the model further read the following texts and then attempt the quiz below.

1. Why Are Supply & Demand Important to a Business?.
2. Supply and Demand on Wikipedia.

Quiz

Answer the following questions.

• If supply decreases, prices will
  • decrease
    • Try again. Think about the courgette example above.
  • stay the same
    • Incorrect. Think about the courgette example above.
  • increase
    • That's right.
• Price decreases result in
  • consumers buying less of the good.
    • Incorrect. Think about why shops have sales.
  • consumers buying more of the good.
    • Yes, correct.
  • no change in consumer buying.
    • Try again. Think about why shops have sales.
• Equilibrium price is where the quantity of a good demanded by buyers equals the quantity producers are willing to supply.
  • True
    • 'That's right.
  • False
    • Think about the meaning of the word 'equilibrium' in other contexts. Does that help?.

References