In microeconomics, supply and demand (S&D) is an economic model of price determination in a market. It postulates that in a competitive market, the unit price for a particular good, or other traded item such as labor or liquid financial assets, will vary until it settles at a point where the quantity demanded (at the current price) will equal the quantity supplied (at the current price), resulting in an economic equilibrium for price and quantity transacted.
Supply and demand are both key to economic activity. The two influence each other and impact prices of consumer goods and services within an economy. Supply is the amount of a particular good or service available at a given time to consumers. Consumers, expressing interest in purchasing a good or service, exhaust available supply, generally resulting in an increase in demand.
Demand is a measurement of consumer desire and consumer spending on a particular good or service at a specific price. As demand increases, available supply decreases and an increased supply may satiate available demand at that price. Prices may fall if supply continues to grow. If supply decreases, prices may continue to increase. Supply and demand have an important relationship that determines the prices of most goods and services. Many companies analyze this market relationship while making strategic production decisions.
Over time, market economy theories claim that this relationship balances out in an equilibrium with prices, supply and demand reaching a close approximation of the perfect allocation of resources to production. At this point, prices are perfectly set to interest consumers and companies produce neither too much nor too little product. Market economies use this as the mechanism determining product development and production.
Consumers, then, dictate which products are produced and sold by creating the demand for companies to supply with goods and services. Companies study consumer behavior in an attempt to understand current and future demand. The capacity to produce enough supply to meet demand keeps prices low enough to entice consumers. In this sense, both supply and demand are equally important to economic vitality.
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