Understanding How Supply/Demand Equilibrium Affects Market Growth

“Supply and demand” is one of those phrases that consumers throw around all the time because it is so visible and easy to understand. Every time we shop and pay for something, we are acting out and contributing to this theory. Not to mention, it affects our wallets and buying power almost immediately. So it’s no wonder that supply and demand is one of the more common and available economic concepts out there.

When supply is low and demand is high, the price for that item usually increases, and vice versa. In the United States, this was most recently seen with toilet paper. Because people were stockpiling toilet paper in preparation for Covid-19 lockdowns, people’s demand for toilet paper raised the commodity’s price because its supply went down significantly.

Supply and demand is an essential law in economics. It affects nearly all economic principles to a certain degree. Practically speaking, supply and demand play on each other until the price of the resource reaches a point of equilibrium, or balance.

The Law of Demand

According to the law of demand, higher-priced goods will be demanded less by consumers, provided there is no change in all other factors involved. The higher the price, the lower the demand. However, in certain cases when demand is high (if supply is low), the price of goods will go up — and consumers will pay that price.

The Law of Supply

As with demand, the law of supply reflects the amount that consumers will buy at a specific price or price range. A higher price means more supply because producers will always want to make more revenue by selling more of their goods.

However, unlike demand, time is a key factor in the supply relationship. Suppliers must, but are not always able to, adapt to price or demand changes quickly. They need to determine the transience or permanence of a price change resulting from a change in demand.

Let’s say the demand for and prices of air conditioners suddenly increase as summer rolls in. In effect, manufacturers will ramp up production accordingly during the season. However, if the weather starts acting weird and summer drags on for much longer than expected, manufacturers will have to make major changes or additions to their current production capacity to accommodate the increased and long-term production or supply, demand.

Demand and Supply Equilibrium

When demand and supply reach levels that put them in a state of balance, they achieve equilibrium. Simply put, this is a point where prices stabilize.

When the supply of a certain good is excessive, its price generally goes down while its demand goes up. This leads to equilibrium. Referred to as the market-clearing price, the equilibrium price is the price at which a producer can make as many units it wants, and a buyer can purchase as many units they desire.

In case a product goes through consolidation or sideways momentum, you can conclude that supply and demand are equal and that the market itself has reached equilibrium.

When a producer brings a resource to the market, its supply is always fixed. This makes the supply curve a vertical line. However, the demand curve will remain sloped downward because of the law of diminishing marginal utility. This law states that the more a consumer uses a good, the less satisfaction they’ll receive from it. They will eventually start buying less of the supply, and demand for it will fall.

When pricing goods, sellers cannot initially exceed what the market will accept. However, with time, suppliers can raise or reduce their supply according to how much they think they can get for their product. Eventually, the supply curve goes up. The more they think they can charge, the more they will want to produce their goods and take them to market.

When the supply curve slopes upward and the demand curve slopes down, you can see where the two lines will meet. This “meeting” is equilibrium; supply and demand are balanced. The exact price and amount at which this happens rests on the supply and demand curves’ shape and position, which are created by a variety of factors.

Supply and Demand Equilibrium on Economic Growth

Understanding the impact of supply and demand equilibrium on economic growth requires a basic understanding of economics. Economies are infinite battlegrounds for supply and demand. For an economy to prosper, or even exist, consumers should have a need for products or services producers make available to them. When consumers want less of something, suppliers naturally make less of it, slowing down the economy as a result.

The Role of Consumer Buying Power

You can analyze economic growth by examining consumers’ buying power. When inflation is high, consumers have less buying power. Each good’s cost will be high relative to consumers’ financial ability. When consumers’ financial resources are higher than the cost of goods, they have more buying power.

The cost of food is a good example. Based on the law of supply and demand, consumer prices for food will increase steeply when demand for it is higher, and supply is lower than normal. When consumers pay more to get food, their buying power is reduced. After all, they need to spend more money to get the good, which means they are left with less cash to cover other expenses.

Job Market

The growth of any economy is attributed partly to the addition of new businesses into the market. Businesses selling consumer goods and services generate jobs for people. When people have jobs, they have the cash to spend and return to the economy.

In an economy where there is a healthy demand for various products and services, businesses will prosper and create more and more jobs. As this cycle goes on, customers keep spending their money, and businesses continue expanding to accommodate the increasing demands of their customers.

Demand and Supply Equilibrium En Route to Economic Growth

When it comes to a product’s success in the market, there is no better position than when it reaches equilibrium, the point where supply and demand intersect. When a product’s price stabilizes, it allows for more predictability and for businesses to plan for further success. Economic growth is possible in an economy where the opportunity for supply and demand equilibrium is plenty.