Section 0: Summary

Key Terms:

Goods - Any physical product you can buy. For example: A hamburger, toaster, fork, car, house, gas, and bananas are all examples of goods.

Services - Something you can pay someone to do for you. For example: Paying someone to mow your lawn, paying someone to do your taxes, and paying someone to fix your car are all examples of you paying for services.

Producers - The people who make, supply, or produce Goods and services.

Consumers - The people who buy /consume Goods and Services.

Demand - Consumers’ desire to purchase goods and services at given prices.

Supply - Describes the total amount of a good or service that is available to consumers.

Quantity Demanded - The actual number of units of a good or service demanded by consumers at a specific price.

Quantity Supplied - The actual number of units of a good or service that is produced by producers at a specific price.

The Law of Demand - When the price of any product increases then the quantity demanded will fall. Also, When the price of a product decreases then the quantity demanded of that product will increase.

The Law of Supply - When the price of a good or service increases then quantity supplied increases. Also, if the price of a good or service decreases the quantity supplied will decrease.

The Law of Supply and Demand - Describes how the supply of a product and the quantity demanded influence the price of a product. In general, as the price of a good or service increases the quantity supplied increases and the quantity demanded decreases. Also, as the price of a good or service decreases the quantity supplied decreases and the quantity demanded increases.

Simply put the Law of Supply and Demand describes the relationship between price, quantity supplied, and quantity demanded.

In summation, The Law of Supply and Demand States:

As price goes up: Quantity Demanded decreases, and Quantity Supplied increases.

As price goes down: Quantity Demanded increases, and quantity Supplied decreases.

All else remaining equal:

If more people want something, its price increases.

If less people want something, its price decreases.

If there is more of something available, its price decreases.

If there is less of something available, its price increases.

Simple example:

All else remaining equal:

If a lot of people want to buy a certain house, the price of that house increases.

If not a lot of people want to buy a house, the price of that house decreases.

If there is a lot of gas available to consumers, the price of gas decreases.

If there is very little gas available to consumers, the price of gas. increases

Further Reading/Information:

Law of Supply and Demand Definition - Investopedia

Supply and demand in 8 minutes , by Jacob Clifford

Introduction to Supply and Demand , by Virtual High School

If you would like a more in depth explanation continue to section 1.

Section 1: Introduction

To understand The Law of Supply and Demand you must first understand The Law of Supply and The Law of Demand.

Section 2: Overview of the Law of Demand

To understand The Law of Demand you must understand what Demand is .

To understand what Demand is, you must understand what Goods , Services, Producers, and Consumers are.

Section 3: Definitions of Goods, Services, Producers, and Consumers

Goods – Any physical product you can buy. For example: A hamburger, toaster, fork, car, house, gas, and bananas are all examples of goods.

Services – Something you can pay someone to do for you. For example: Paying someone to mow your lawn, paying someone to do your taxes, and paying someone to fix your car are all examples of you paying for services.

Producers- The people who make, supply, or produce Goods and services.

Consumers- The people who buy /consume Goods and Services.

Now that you understand what goods, services, producers, and consumers are, you can understand what Demand is.

Section 4: Definitions of Demand

Here are two definitions of demand from two good sources:

Demand - consumers’ desire to purchase goods and services at given prices.

https://www.investopedia.com/terms/d/demand.asp#:~:text=Demand%20is%20an%20economic%20principle,quantity%20demanded%2C%20and%20vice%20versa.

Demand - the amount of some good or service consumers are willing and able to purchase at each price.

https://courses.lumenlearning.com/wm-microeconomics/chapter/what-is-demand/

Now that you understand what Demand is, you can understand The Law of Demand.

Section 5: Quantity Demanded

Quantity Demanded –The actual number of units of a good or service demanded by consumers at a specific price.

Quantity Demanded example: Lets say your local grocery store usually sells peanuts for $10 a can but, put them on sale for 50% off, making peanuts $5 a can. Most people usually only buy one can, but since the peanuts are half off people decide to opt to buy 2 cans of peanuts. In this scenario the quantity demanded of peanuts increased. This is because the actual units of peanuts people are willing to buy increased.

Demand Example: Lets say a study came out tomorrow saying that peanuts made you better looking. In this scenario the demand for peanuts would increase, because people would generally have a greater desire to buy peanuts.

If your still a little confused take a look at this article, which explains the difference between demand and quantity demanded:

https://keydifferences.com/difference-between-demand-and-quantity-demanded.html

Section 6: The Law of Demand

The Law of Demand – When the price of any good or service increases then the quantity demanded for that good or service will fall. Also, When the price of a good or service decreases then the quantity demanded for that good or service will will increase.

https://www.wallstreetmojo.com/law-of-demand/

Simply put when price of something increases the demand for it falls. When price of something decreases demand rises.

Section 7: Overview of the Law of Supply

Now that we understand The Law of Demand, we will go over The Law of Supply. To understand The Law of Supply you need to understand what Supply is.

To understand what Supply is, you need to understand what Goods, Services, Consumers and Producers are. If you still do not understand what Goods, Services, Consumers and Producers scroll back up to Section 2: Definitions of Goods, Services, Producers, Consumers.

Section 8: Definition of Supply

Supply - describes the total amount of a good or service that is available to consumers.

https://www.investopedia.com/terms/s/supply.asp

Simply put, Supply describes how much of a good or service is available to consumers.

Now that we understand Supply, we can now understand The Law of Supply.

Section 9: Quantity Supplied

Quantity Supplied - The actual number of units of a good or service that is produced by producers at a specific price.

Quantity Supplied Example: Lets say a grocery supplies 100 cans of peanuts per month for $10 a can. Lets say the government puts a price cap on the price of peanuts at $5 a can. Now that the store is forced to sell the peanuts for $5 a can they are not going to supply as much since they wont make as much profit from selling the peanuts. So now they supply 50 cans of peanuts a month. This is an example of a decrease in quantity supplied, because the actual units of cans being supplied decreased.

Supply Example: Let's say that the government decides they want more people to eat peanuts, so they subsidize the production of peanuts. So it is cheaper across the board to produce peanuts. This causes the Supply of peanuts to increase. The Supply increases because more peanuts are produced everywhere.

If your still a little confused take a look at this article, which explains the difference between Supply and quantity Supplied:

https://keydifferences.com/difference-between-supply-and-quantity-supplied.html#:~:text=Supply%20represents%20how%20much%20the,supply%20at%20a%20specific%20price.

Section 10: The Law of Supply

The Law of Supply – When the price of a good or service increases then quantity supplied increases. Also, if the price of a good or service decreases the quantity supplied will decrease.

Simply put, as price rises for a good or service more of it is produced. Also, as price for a good or service decreases less of it will be produced.

Section 11: The Law of Supply and Demand

Now that we understand The Law of Supply and The Law of Demand, we can understand The Law of Supply and Demand.

The Law of Supply and Demand – describes how the supply of a product and the quantity demanded influence the price of a product. In general, as the price of a good or service increases the quantity supplied increases and the quantity demanded decreases. Also, as the price of a good or service decreases the quantity supplied decreases and the quantity demanded increases.

https://www.investopedia.com/terms/l/law-of-supply-demand.asp

Simply put the Law of Supply and Demand describe the relationship between price, quantity supplied, and quantity demanded.

In summation, The Law of Supply and Demand States:

As price goes up: Quantity Demanded decreases, and Quantity Supplied increases.

As price goes down: Quantity Demanded increases, and quantity Supplied decreases.

Let’s do an example

Let’s say we have the current quantity supplied, the current quantity demanded, and the current price of a good or service.

Let QS = quantity supplied of the good or service

Let QD = quantity demanded of the good or service

Let P = price of the good and service.

If all else remains equal ( meaning there are no other outside factors that would affect our outcome ), if for some reason P increased what would happen to QS and QD. Think about this question if you need help scroll up to Section 8: The Law of Supply and Demand.

Solution

From our Law of Supply and Demand section we learned:

As price goes up: Quantity Demanded decreases, and Quantity Supplied increases.

As price goes down: Quantity Demanded increases, and quantity Supplied decreases.

Or in terms of our variables

If P goes up: QD decreases, and QS increases

If P goes down: QD increases, and QS decreases

So, the answer to our question “If all else remains equal, if for some reason P increased what would happen to QS and QD”. Our solution would be: if P increased then QD would decrease, and QS would increase.

Section 12: Examples of The Law of Supply and Demand

The big take away from all this, and the very useful thing people do with the law of supply and demand is that we can use the law of supply and demand to predict how price would react if supply and or demand changed.

Demand increases, supply constant example:

For example, let’s say for some reason the demand for toilet paper skyrocketed (who could imagine that?). Let’s also say that toilet paper suppliers produced about the same amount of toilet paper, so supply remained the same. So, demand increased and supply remained the same. What do you think would happen to the price of toilet paper in this far-fetched example?

If you said that the price of toilet paper would increase, then you were correct.

Hopefully this makes intuitive sense to you. If there is something that suddenly everyone wants to get their hands on, yet there is the same amount of it to go around. Then sellers can and will sell it at a higher price.

Demand decreases, supply constant example:

Let’s say there is a video game that comes out. Let’s say the video game manufacturer made X copies of the game. Let’s say consumers decided they did not like the game that much. So, demand for the game plummeted. Since the game producer made X copies of the game, the supply of the game is constant. If demand for the game decreased, and supply of the game remained constant, what would happen to the price of the game?

If you said that the price of the game would fall, then you were correct. Hopefully this makes sense. If not that many people want to buy something yet there is a lot of that thing available, sellers will have to take what they can get to sell the product.

Supply Decreases, and demand constant example:

Let’s do another example. Let’s say that for some reason it was harder to get gasoline to consumers. Meaning that the supply would decrease (since there is less of it available). Since people can’t just stop using gasoline, since we are so reliant on it, the demand would remain the same. So, if the supply decreased and the demand remained the same, what would happen to the price of gasoline?

If you said that the price of gasoline would increase, then you are right. Again, this hopefully should make intuitive sense to you. If everyone needs something and suddenly there is less of that thing to go around then sellers can and will sell that thing for a higher price.

Supply increases, and demand remains constant

Let’s use the gasoline example again. Let’s say for some reason it is now easy to get gasoline to consumers, so the supply of gasoline increases. For this example assume consumers use the same amount of gas no matter what, so we’ll say that the demand for gasoline remains constant. If the Supply of gas increased and the demand remained constant, what do you think would happen to the price of gasoline.

If you said the price would decrease, then you are correct. This should hopefully make sense. If everyone needs something, but there is more of that thing available to buy people can be pickier where they buy it and search for a better bargain.

Supply and demand both increase/decrease

If supply and demand both increase by the same amount price would remain the same. This makes sense because if a lot more people want a good or service but, a lot more of that good or service becomes available, sellers couldn’t charge more for it despite the increased demand, because the increased supply would mean buyers would have more sellers to buy from and could be pickier.

If both Supply and demand decrease by the same amount, then price again would remain the same. This is because while less people want the good or service there would also be less of it available to consumers, so consumers couldn’t be as picky.

Supply increases and demand decreases

If supply increased while demand simultaneously decreased price would fall sharply. This is because less people want to buy the good or service and there is more of it available to buy. So, the smaller amount of people who want to buy the good would have more places and options to buy from.

Supply decreases demand increases

If supply decreased and demand increased price would rise sharply. This is because more people would want to buy the good or service while there is less of it to go around. So, the larger amount of people who want to buy the good would have to fight for the smaller supply, allowing sellers to charge a higher price.

Sources:

https://courses.lumenlearning.com/wm-microeconomics/chapter/what-is-demand/

https://www.investopedia.com/terms/d/demand.asp#:~:text=Demand%20is%20an%20economic%20principle,quantity%20demanded%2C%20and%20vice%20versa

https://www.wallstreetmojo.com/law-of-demand/