Demand and Supply

When one talks about Economics, there is always one thing that will come across their mind, demand and supply. Almost everything in the economy works by demand and supply, most goods and services in a free-market economy is determined by demand and supply (market mechanism).

So what is demand? Demand is the amount of goods and services that a consumer is willing and able to consume at a given price during a given period of time, ceteris paribus. The Law of Demand states that the quantity demanded for a good/service is inversely related to the price of the good itself, ceteris paribus. However, there are two exceptions to the Law of Demand, namely Giffen goods and Veblen goods where there are nearly no more examples of such goods in today's economy.


Say there is an increase in demand in the price of Macbooks from P1 to P2, this will result in an upward movement in the demand curve and the quantity demanded for a Macbook will move from Q1 to Q2. This is due to the price being more expensive and it is considered not worth it to purchase that product. They will then wait for the price to drop again, say at a sale or when the model is about to be phased out. Should the price decrease again from P2 to P1, the quantity demanded for Macbooks will move from Q2 back to Q1 and the demand curve will shift downwards.

A shift in the demand curve is very different from a movement in the demand curve. A movement in the demand curve can only occur when the price of the good itself changes, whereas a shift in the demand curve is dependent on other factors (not including the price of the good itself). The factors affecting the demand for a Macbook include income, the price of other products, tastes and preferences. Given that people's income have decreased owing to the current financial crisis, this is likely to result in a leftward shift in the demand curve as they now have less money to spend and will spend only on things that are necessary. If the price of a Windows laptop increases, it will lead to a rightward shift in the demand curve where there will be an increase in demand. More people will buy Macbooks as it is cheaper and it has a better value. Consumers may also choose a Macbook over a laptop as it is generally better in terms of looks, operating system and interface, as well as the technical aspects of it. These are all tastes and preferences of a consumer and varies from one consumer to another.

What is the definition of supply then? Supply is the amount of goods and services that the producer is willing and able to produce at a given price during a given period of time. The Law of Supply states that the quantity supplied by producers is inversely related to the price of a good/service, ceteris paribus. The supply curve is upward sloping which is unlike the demand curve i.e. downward sloping.


The change in the price of the good will lead to a change in the quantity supplied as well as a movement in the demand curve. If the price of cars increases from P1 to P2, the quanity supplied will increase from Q1 to Q2 with an upward movement in the supply curve. This is due to a higher price will result in more supplied since they will able to earn a higher profit.

The determinants of supply include the cost of factors of production, the price of other products where the producer can produce instead of the current product, the state of technology and government intervention. A change in any of these factors will lead to a shift in a shift in the supply curve. Nowadays, with the improvements in technology, there is an increase in the supply of clothes since it is now produced by machinery (capital) compared to it being produced by workers (labour).

This is one of the most important concepts in Economics. Without understanding this concept, one will not be able to understand what Economics is all about as this is the primary concepts one learns in Economics. Countless of goods/services in the world are all determined by demand and supply.

Terence Ong
5x