Supply and Demand: A simple Guide

Today, we’re starting to explain one of the most important economic concepts that affect your life every single day.
It’s the reason behind the prices of products you see around you.
By the end of this article, you will clearly understand what the Law of Demand is, what the Law of Supply is, how they’re connected, and what factors can make them shift and change.

Understanding supply and demand will help you explain a lot of the things happening around you, from why prices go up to why stores sometimes run out of products.

Don’t worry — the explanation will be simple, direct, and with real-life examples you can relate to.

Let’s dive in!

What is Demand?

Demand is the quantity of goods and services that people are willing and able to buy at different prices over a certain period of time, assuming other factors stay the same.
(Keep this phrase in mind — we’ll come back to it later!)

Let’s make it easy:
Who doesn’t love pizza?

Imagine I ask you:
How many slices of pizza would you buy each week if the price is $2 per slice?
Maybe you’ll say, “At $2, I won’t buy any pizza, it’s too expensive.”
Now, if the price drops to $1.5 per slice, you might say, “Okay, I’ll buy 1 slice.”
If the price goes down to $1 per slice, maybe now you’ll buy 2 slices.
If the price drops even more to $0.5 per slice, you might want 4 slices!

Now, imagine asking a whole group of people the same questions.
Everyone will have different answers, but when we add them all together, we get the total market demand for pizza at each price.

The important thing to notice:
There’s an inverse (opposite) relationship between the price and the quantity demanded.
The cheaper the pizza gets, the more pizza people want to buy.
If prices rise, people buy less.

The Law of Demand

The Law of Demand:
When the price of a good falls, the quantity demanded increases.
When the price of a good rises, the quantity demanded decreases.

But Wait — Other Factors Affect Demand Too!

Remember when I said “assuming other factors stay the same”?
Well, in real life, these factors change too, and they can shift the entire demand curve — not just move along it.

Let’s see what these factors are:

1. Tastes and Preferences

If people suddenly start loving pizza more because of social media ads or a trend, the demand for pizza will shift to the right.
This means at every price, people are willing to buy more pizza.

(Notice: this is not because the price changed — it’s because people’s preferences changed.)

2. Income

When people’s income increases, their ability to buy goods improves.
For normal goods like pizza, higher income means demand shifts to the right.
If income drops, demand shifts to the left because people can’t afford as much.

3. Prices of Related Goods

• Substitute Goods:
  If hot dogs and pizza are substitutes, and suddenly a study says hot dogs are unhealthy, people will stop buying hot dogs and buy more pizza instead.
  This causes pizza demand to shift right.
• Complementary Goods:
  If pizza and soda are usually bought together, and the price of soda drops, people buy more soda and more pizza!
  (Because now having pizza + soda is cheaper.)
  This also shifts the pizza demand curve to the right.

4. Expectations About the Future

If people believe pizza prices will rise next month, they might buy more pizza now.
Demand shifts right today.

If people expect prices to fall soon, they wait, and demand shifts left today.

5. Number of Buyers

If the number of people who want pizza increases (for example, due to population growth), demand shifts right.
If the number of buyers falls, demand shifts left.

What is Supply?

Supply is the quantity of goods and services that sellers are willing and able to offer at different prices over a period of time.

The key difference from demand:

• Demand = buying
• Supply = selling

Back to pizza:
Imagine you own a pizza shop.
If the price is $0 per slice, you won’t sell any — you’re losing money.
If the price rises to $1 per slice, you might sell 2 slices.
At $1.5, maybe you’re willing to sell 3 slices.
At $2, you’ll be happy to sell 5 slices!

And if we ask other pizza shop owners the same, we can find the total market supply.

The important thing to notice:
There’s a direct (positive) relationship between the price and quantity supplied.
The higher the price, the more sellers want to supply.
If the price falls, sellers produce less.

The Law of Supply

The Law of Supply:
When the price of a good rises, the quantity supplied increases.
When the price of a good falls, the quantity supplied decreases.

Other Factors Affecting Supply

Just like demand, other factors can shift the supply curve:

1. Costs and Technology

• Higher production costs (labor, raw materials, rent) shift the supply curve left (less supply at each price).
• Better technology makes production cheaper and faster, shifting supply right (more supply at each price).

2. Prices of Related Goods

If hot dogs become very profitable, some pizza shops might switch to selling hot dogs instead.
This would shift the pizza supply curve to the left (less pizza in the market).

3. Expectations About Future Prices

If sellers expect pizza prices to rise in the future, they might hold back on selling today, shifting supply left.
If they expect prices to fall, they’ll want to sell more now, shifting supply right.

4. Number of Sellers

More pizza shops opening = supply curve shifts right (more pizza).
Shops closing = supply curve shifts left (less pizza).

5. Weather and Natural Conditions

Mostly affects agriculture, but bad weather can reduce supply (shift left) and good weather can increase it (shift right).

How Supply and Demand Work Together

Let’s put it all together!

Here’s a basic table for pizza:

• At $2, quantity demanded = 500, quantity supplied = 100 → Shortage (not enough pizza!).
• At $5, quantity demanded = 200, quantity supplied = 400 → Surplus (too much pizza!).
• At $4, quantity demanded = 300, quantity supplied = 300 → Equilibrium (perfect match!).

Short Run vs Long Run Adjustments

In the short run, prices adjust but it takes time for sellers and buyers to react fully.

For example:

• In a shortage, prices start rising, quantity demanded falls a little, supply rises a little.
• In a surplus, prices start falling, quantity demanded rises a little, supply falls a little.

In the long run, people adjust more:

• Producers might build new factories if prices stay high.
• Buyers might find alternatives if prices stay high.

Markets are more flexible in the long run than in the short run!

Summary

• Demand and Supply are simple ideas but they explain a LOT about the world around you.
• Prices are signals: they balance what people want and what sellers are willing to offer.
• In the short run, prices adjust, but in the long run, the whole market adjusts.
• Elasticity shows us how sensitive people and companies are to changes in prices.
• Substitute and complementary goods connect markets together in surprising ways!

What Happens When Supply and Demand Shift Together?

Okay, now that you know how supply and demand move on their own, let’s make it a bit more real:
In life, it’s rare that only supply or only demand changes — most of the time they both change together!

So what happens if both supply and demand shift at the same time?

Let’s break it down simply:

• If demand and supply both increase:
  • The quantity sold will definitely go up.
  • But the price? It depends which one increased more!
    • If demand increased more than supply → price goes up.
    • If supply increased more than demand → price goes down.
• If demand and supply both decrease:
  • The quantity sold will definitely go down.
  • Same thing with the price:
    • If demand falls more → price falls.
    • If supply falls more → price rises (because fewer things are available).
• If demand increases but supply decreases:
  • Both things push the price up strongly!
  • But the quantity? It could go up, down, or stay the same depending which effect is stronger.
• If demand decreases but supply increases:
  • Both push the price down strongly!
  • Again, quantity could go up or down depending.

The key point:
When both move together, the final effect depends on which one changes more and how fast.

It’s like a tug-of-war between buyers and sellers!

Why Understanding Supply and Demand Matters

Now you might be wondering:
“Okay, cool… but why should I even care about all this?”

Let me tell you something:
Understanding supply and demand is not just about passing a class or sounding smart.
It’s about living smarter every single day.

• When you see prices going up or down, you’ll understand why.
• When you want to start a business, you’ll know when it’s a good time to enter the market.
• When you’re thinking about investing your money, you’ll better predict how markets move.

Knowing how markets work gives you an edge over people who just “guess.”
It helps you make better decisions — in buying, selling, saving, and even negotiating.

So even if it sounds simple, trust me:
Supply and demand is one of the most powerful tools you’ll ever learn.

Source

Moayad Bitar

Economic researcher and investor in financial markets since 2017. I work on simplifying economic concepts and analyzing the financial behaviors of societies, with a focus on correcting misconceptions that influence the decisions of individuals and institutions. Through my content, I aim to present simplified economic ideas in clear, relatable language, grounded in real-life studies and experiences.