Demand and Supply

Demand reverses to the buyers in the market and supply to the producer or sales area. Consumers and producers meet in the market place and eventually come to an agreement to trade a product at a certain price. This price is known as the equilibrium price (or market clearance price) and at that price only a certain equilibrium amount will be sold. Thus, in this study section the discussion is about the buying and selling of a single product; so we are talking “micro-economics” now! Demand-and-supply is the most basic instrument that economists utilise to analyse the economy. The same principles will also apply in Macro-economics when the total demand and supply of the entire country are considered.

We will look at the demand of consumers first. As the saying goes: “the customer is king”. Consumers are the buyers of products and services. Demand is, however, more than a need. Only when a person has a need and the ability to pay for it and willing to pay for it, will it be called “demand” The modern world is often described as a society of consumers. Economic theory tries to explain the behaviour of consumers. Although the individual behaviour of people differs, the rational human being can be seen as the “normal” case.

A theory on consumer behaviour enables one to understand why individuals have certain buying and spending patterns, and why certain products and services are higher in demand than others are. Such knowledge can be valuable to the business manager and could be used to determine the demand for a particular product.

In his influential work “The Wealth of Nations” Adam Smith (1776:119) says: “It is not for the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest”. Entrepreneurs will notice the needs of others and try to provide it to them, for his own sake and to maximise his profits in such a way. In this way, the needs of everyone will be addressed. Because someone else thinks that he would be able to make a living and generate profits, by selling bread for instance, others do not have bake their own bread or search for someone who has extra bread. The consumer can now just go to the shop.

The reaction of producers to the needs of consumers leads to a wide range of products and services being offered in the market. When the economy is systematically being investigated, one of the functions that can be recognised is production – or rather, the basic task of society to organise a system through which enough goods and services will be produced to ensure survival of the society.

Equilibrium is reached in the market when demand equals supply. Surpluses or shortages will result if equilibrium is disturbed and marker forces will then lead the market back to equilibrium. Consumer and producer surpluses are generated at the point equilibrium, which implies that the market mechanism is to everyone’s advantage.  

Watch these video's to better understand demand and supply: