The law of supply and demand reflects the relationship between the amount of goods or services demanded and the available supply of goods and services.

The law of supply and demand states that a change in one causes a change in the other.

How Does Supply Affect Demand?

According to the law of supply and demand, when there is higher demand for a commodity. There will generally be a subsequent rise in the supply of such commodity as producers rush to produce more of the good.

How Does Supply and Demand Affect Price?

If the supply of a product is low and the demand is high, it means such product is scarce and insufficient for the number of people that want it. Hence, it will lead to an increase in the price of the product. That is, only the individuals who are willing to pay the highest price will be able to purchase the available goods. So, the average price of all goods sold will be higher.

When there is excess supply in the market and a low demand for the supplied products. Producers will not be able to sell all of their goods without lowering the price to a point that the amount demanded will equal the amount available. As such, there is a decrease in the average price of goods in the market.

What is an Equilibrium Price?

Consumers are willing to purchase a certain quantity of goods or services at any given price. They will purchase more at a low price and less at a high price.

Producers are willing to produce a certain quantity of goods and services at any given price above the breakeven point (where marginal revenue from the sale of the next good equals the cost of producing that good). They will produce less at lower prices and more at higher prices.

The price point where the amount demanded equals the amount supplied is known as the equilibrium point.

We use graphs to illustrate this principle.

The price of a good is thus affected by the supply of that good.

Recall, when there is limited supply or quantity available, the resource is scarce.

Factors Affecting Supply

Producers do not have the unfettered about to produce goods. They are limited by factors of production. The following factors directly affect the level of supply produced:

• the capacity of a producer or company
• the costs of producing specific items including cost of materials, labor, and equipment
• the presence of competitors in the market
• the weather, if the production of an item is determined by weather
  the supply chain

Factors Affecting Demand

Consumers will demand more or less of a good or service based upon numerous factors. The common factors that affect demand are:

• The cost of a product, that is, the price at which the product will be purchased.
• The availability of other alternatives in the market.
• The importance of the product, whether it is an inferior good or otherwise.
• The price of complementary products.

Does Supply and Demand Matter in Macroeconomics?

Recall that macroeconomics focuses on productivity.

The level of supply and demand is an important gauge for measuring economic growth and it is important when calculating the gross domestic product (GDP) of a country for a particular time.

The rate of employment and unemployed is highly dependent upon levels of supply and demand.

The law of demand and supply is also applicable to wages for labor, business growth, among others.