At the heart of all markets is the concept of supply and demand. This is true for a local fruit and veg market as much as a stock exchange, an online shopping platform or even the all-encompassing abstract market that governs the full gamut of humanity’s transactions. The market strives to balance the types and volumes of goods and services provided by suppliers against the goods and services demanded by consumers – a relationship in fairly constant flux.
Demand, in simple terms, relates to the quantity of goods or service that consumers want at a certain price. Supply, on the other hand, is concerned with the quantity of goods or service that producers make available at a given price. Both consumers and suppliers face key questions as they approach a transaction from their opposing positions. Firstly, the consumer must decide whether they want a particular product, and then whether they are prepared to pay the price being asked by the supplier. They must also consider the question of opportunity cost: that which is given up in the process of making a particular economic decision. For instance, if I pay for a holiday, I won’t be able to afford a new car. The supplier, meanwhile, faces different but related questions. How great is the demand for what I am offering? How large a price will the market bear? Is it enough for me to turn a profit?
At the end of the 19th century, Alfred Marshall popularized the standard model of supply and demand. He created a simple graph in which supply and demand are shown to be inversely proportional to each other in relation to price. In other words, as price increases, demand broadly declines and supply grows, while a price decrease sees supply fall and demand grow. By plotting their relative trajectories, he established the point at which they cross as signifying market equilibrium – the holy grail of the market, where supply exactly matches demand.
The seesaw of supply and demand
The general law of supply and demand is straightforward: if all other factors remain the same, the lower the price of a good or service, the more people will demand it; on the other hand, as demand grows, suppliers will seek to provide more and at a greater price, so maximizing their profit. The 14th-century Syrian academic, Ibn Taymiyyah, was among the first to put the idea into words: ‘If desire for goods increases while its availability decreases, its price rises. On the other hand, if availability of the good increases and the desire for it decreases, the price comes down.’
Of course, levels of supply and demand are subject to many disparate and unpredictable factors – climate change, for example, may lead to a long-term upsurge in demand for sun-protection, while prompting a downturn in the supply of bread as a result of higher volumes of failing crops. Yet the fundamental law continues to wield enormous influence on the markets – and on our everyday lives too.