Demand-Supply Analysis - Explained
What is a Demand Supply Analysis?
Written by J. Mance Gordon
Updated at May 6th, 2024
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What is a Demand-Supply Analysis?
In a market economy, the level of demand and supply of all goods and services jointly determines the price level and quantity of that good (or service) in the economy.
When to Use Supply Demand Analysis?
The law of demand states that (with a few exceptions) as price rises, the quantity demanded of any good or service would be lower.
The law of supply implies that higher the price received by a supplier, the quantity supplied will rise. Thus, demand is often a downward sloping curve in the price-quantity plane, while supply is an upward sloping curve.
What is the Equilibrium Price?
The intersection of the supply and demand curve denotes the market equilibrium, which in turn determines the equilibrium levels of price and quantity of the particular good (or service) in the economy.
If the present demand for a good (or service) in the economy is higher than the equilibrium quantity, the situation is described as that of an excess demand. Excess supply is also defined in a similar fashion.
What Causes Shifts in Supply or Demand?
Changes in Supply and demand (and thus the equilibrium price and quantity) of any good or service could be governed by a lot of factors, such as: changes in policies, unpredictable shocks to the economy, business cycle fluctuations like a recession or a boom, or even simply over time (long run versus short run). It also depends on the nature of the market (whether the market is perfectly competitive or monopolistic etc.).
The analysis of all the above could be termed as the study of the supply and demand, or simply, 'Demand Supply Analysis'.
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