Supply and Demand (Annabelle, 5W)

For the first time in 16 years since 1993, fast-food chain Kentucky Fried Chicken (KFC) in Japan has announced that from April 24th 2009 onwards, all items sold at all 1,150 outlets nationwide will experience a price hike of about 7%. It is not only KFC that has announced the sudden need for consumers to pay higher prices – various other restaurants and cafes across the country have raised their selling prices, and this is mainly attributed to the sudden jump in dairy, meat and beer prices as well as the price of wheat, corn and soybeans, which are used in the chicken feed that fast-food giants such as KFC provide for their birds. This is a clear-cut example of the theory of supply and demand, which can be further understood through the use of definitions of the two terms, diagrams explaining shift and movement and examples of the theory evident in real life situations.

Firstly, what exactly is supply and demand? Supply, by definition, is the amount of product that a producer is willing and able to sell at a certain price at a given time, ceteris paribus. The Law of Supply states that price of a good is directly related to supply; for example, the supply of a good will increase as prices increase and decrease as prices decease. At higher prices, producers are more willing to offer their products for sale. Demand, on the other hand, can be defined as the amount of a product that a buyer is willing and able to buy at a specified price at a certain time, ceteris paribus. The Law of Demand states that if prices are low, more people are able to afford to buy more goods more frequently than they can at a higher price. However, if prices are high, people tend to choose to buy other cheaper goods as substitutes for the more expensive goods they can no longer afford.

The easiest way of looking at the theory of supply and demand would be through using the recent worldwide recession as an example. Millions of people all over the world lost their jobs, leaving many families with no source of income. Products that people could once afford were suddenly too expensive, even though the price of the good had not changed at all. Sale of real estate, for example, has plummeted compared to figures from early 2008, and the sale of small cars has dropped about 15% while sale of luxury cars have dropped about 50% since the recession hit. The demand for unnecessary luxury items such as jewellery and fine dining will decrease as people begin to watch their expenditure, leading to a decrease in demand for these goods. As a result, producers find that they have no choice but to sell their goods at a lower price, therefore leading to a decrease in their overall profit levels. Lower profits lead to a lower desire for producers to produce their products. Such unappealing scenarios eventually lead to a decrease in the production and supply of a good, simply because producers are unwilling to offer their products for sale when the demand for such a product is low.

The two diagrams below illustrate how the supply and demand of luxury cars has been affected by the recession.

Figure 1

Figure 2

In Figure 1 there is a shift leftwards on the demand curve from Q1 to Q2 as there is a decrease in quantity demanded of the good although price, P1, remained the same. In Figure 2 there is a shift leftwards on the supply curve from Q1 to Q2 as there is a decrease in the production and supply of the good, although price, P1, remained the same.


Supply and demand is not a difficult concept to grasp. Ultimately, everything is interlinked in one big equation – you can’t experience a change in demand without seeing some kind of change in supply, whether gradual or immediate. All around us the theory of supply and demand exists, not only appearing on the news because of the recent worldwide recession but existing continually in retail outlets, restaurants and real estate, just to name a few. The theory of supply and demand is, undoubtedly, one of the most fundamental concepts when it comes to economics and is perhaps, even, the backbone of any market economy worldwide.

- Annabelle, 5W