what is the law of supply and demand 
the law of supply and demand combines two fundamental economic principles that describe how changes in the price of a resource commodity or product affect its supply and demand supply rises while demand declines as the price increases supply constricts while demand grows as the price drops levels of supply and demand for varying prices can be plotted on a graph as curves the intersection of these curves marks the equilibrium or market clearing price at which demand equals supply and represents the process of price discovery in the marketplace investopedia alex dos diazunderstanding the law of supply and demandit may seem obvious that the price satisfies both the buyer and the seller in any sale transaction matching supply with demand the interactions between supply demand and price in a free marketplace have been observed for thousands of years 1many medieval thinkers distinguished between a just price based on costs and equitable returns and one at which the sale was transacted just like modern day critics of market pricing for select commodities 2our understanding of price as a signaling mechanism matching supply and demand is rooted in the work of enlightenment economists who studied and summarized the relationship supply and demand don t necessarily respond to price movements proportionally the degree to which price changes affect the product s demand or supply is known as its price elasticity price discovery based on supply and demand curves assumes a marketplace in which buyers and sellers are free to transact or not depending on the price products with a high price elasticity of demand will see wider fluctuations in demand based on the price basic necessities will be relatively inelastic in price because people can t easily do without them so demand will change less relative to changes in the price factors such as taxes and government regulation the market power of suppliers the availability of substitute goods and economic cycles can all shift the supply or demand curves or alter their shapes however the commodities affected by these external factors remain subject to the fundamental forces of supply and demand as long as buyers and sellers retain agency the law of demandthe law of demand holds that demand for a product changes inversely to its price when all else is equal the higher the price the lower the level of demand buyers have finite resources so their spending on a given product or commodity is limited as well higher prices reduce the quantity demanded as a result demand rises as the product becomes more affordable changes in demand levels as a function of a product s price relative to buyers income or resources are known as the income effect but some exceptions exist one is giffen goods these are typically low priced staples also known as inferior goods they re those who see a drop in demand when incomes rise because consumers trade up for higher quality products the substitution effect turns the product into a giffen good when the price of an inferior good rises and demand goes up because consumers use more of it in place of costlier alternatives veblen goods are at the opposite end of the income and wealth spectrum they re luxury goods that gain in value and consequently generate higher demand levels as they rise in price because the price of these luxury goods signals and may even increase the owner s status veblen goods are named for economist and sociologist thorstein veblen who developed the concept and coined the term conspicuous consumption to describe it 3the law of supplythe law of supply relates price changes for a product to the quantity supplied the law of supply relationship is direct not inverse the higher the price the higher the quantity supplied lower prices mean reduced supply all else being equal higher prices give suppliers an incentive to supply more of the product or commodity assuming their costs aren t increasing as much lower prices result in a cost squeeze that curbs supply supply slopes are upwardly sloping as a result as with demand supply constraints may limit the price elasticity of supply for a product supply shocks can cause a disproportionate price change for an essential commodity equilibrium pricealso called a market clearing price the equilibrium price is that at which demand matches supply producing a market equilibrium that s acceptable to buyers and sellers supply and demand in terms of the quantity of the goods are balanced at the point where an upward sloping supply curve and a downward sloping demand curve intersect leaving no surplus supply or unmet demand the level of the market clearing price depends on the shape and position of the respective supply and demand curves which are influenced by numerous factors factors affecting supplysupply will tend to decline toward zero at product prices below production costs in industries where suppliers aren t willing to lose money price elasticity will also depend on the number of sellers their aggregate productive capacity how easily it can be lowered or increased and the industry s competitive dynamics taxes and regulations may matter as well factors affecting demandconsumer income preferences and willingness to substitute one product for another are among the most important determinants of demand consumer preferences will depend in part on a product s market penetration because the marginal utility of goods diminishes as the quantity owned increases the first car is more life altering than the fifth addition to the fleet the living room tv is more useful than the fourth one for the garage 