How Does a Change in Supply Affect Demand?
Typically, the relationship between supply and demand is indirect. When supply increases, the typical result in the market is a reduction in price point. This usually leads to an increase in demand. When supply is decreased, prices tend to rise, with a net result of lower demand.
Supply and demand variables are among the more pertinent and basic topics of economics. Producers and resellers often consider the level of supply and how this will affect price and demand. Some providers focus on a small supply of customized or high quality products, in hopes that limited supply will drive up price. Mass producers or high volume providers typically produce as much supply as possible at low costs and try to sell a large enough volume to earn substantial profits.
The law of supply in economics indicates that when market demand is high and price is high, suppliers will produce more and more suppliers will enter the market in hopes of taking advantage of the demand and margin opportunities. Over time, this increases supply, which tends to stabilize or lower prices. On the contrary, if market demand is low and price points are low, fewer suppliers are interested in the market, which may limit supply and ultimately increase prices.
Supply and demand curves are often compared on a graph to show the affects of changes in supply or demand in correlation to price. The typical demand curve slopes from upper left to lower right to show that demand increases as price goes down. The supply curve slopes from lower left to upper right to show that supply moves higher as price goes up. In theory, only one price point exists where supply and demand are in equilibrium based on the ideal market price and the curves cross each other.
The supply and demand curve graph also shows two more common conditions in supply and demand known as shortage and surplus. Shortage is a condition that exists when supply is not enough to meet demand. On the graph, this area falls below the point of equilibrium and between the two slope lines. Surplus means excess supply is available. This area exists above the point of equilibrium and between the upper extensions of the two slopes.