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8 Examples of the Law Of Supply And Demand

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The law of supply is the principle that an increase in price results in an increase in supply. The law of demand is the principle that an increase in demand results in an increase in price. The following are illustrative examples of the implications of these fundamental economic principles.

Price Decreases Demand

The basic direction of a demand curve points down as people generally demand less of a good when it is more expensive.

Price Increases Supply

The basic direction of a supply curve points up as market participants will find ways to increase supply as a higher price is offered.

Demand Increases Supply

More demand increases the price, creating more supply. For example, a television show talks about the health benefits of a particular fruit. Other media outlets pick up on the idea and a large number of people start buying the fruit. Demand increases dramatically, driving up prices. Farmers see these prices and begin to allocate land, labor and capital to producing the fruit. In the following years, the supply of the fruit doubles.

Supply Decreases Price

Increased supply results in a lower price. For example, if there were 10,000 computer science graduates each year they might each have multiple job offers and be in a good position to negotiate a high salary. However, if the number of computer science graduates suddenly jumped to 1 million, salaries would drop as competition for each position would become more intense.

Supply Increases Demand ... Sometimes

In many cases, more supply ends up creating more demand by pushing prices down. This isn't always true because if you're supplying something people don't want it will not impact demand. However, a product with healthy demand will generally see an increase in demand when supply increases. For example, if the supply of apples doubled next year prices would tumble and some consumers would buy more apples based on price comparisons with other foods.

Business Cycles

The law of supply and demand explains the cycles of boom and bust experienced by many industries. A rising price causes capital investment to increase supply. Depending on the industry, it can take months or years for the new supply to show up. When supply does finally increase it causes prices to decline. The declining prices cause supply to drop as firms reallocate resources or exit the industry. The price begins to increase again due to less supply and the cycle repeats.

Inflation

Extremely high inflation can cause the laws of supply and demand to break down. For example, inflation causes people to buy goods more quickly because money loses its value. This is a situation whereby higher prices may actually stimulate more demand as it simply causes people to fear the prices of tomorrow.

Giffen Goods

Giffen goods are a category of goods that people buy more as the price rises. This is another exception to the laws of supply and demand. For example, in some nations rice may be a giffen good. When the price of rice increases, people may buy less meat as they need to conserve their food budget. The decline in meat consumption results in more rice consumption as people need to replace the calories.
Overview: Law Of Supply And Demand
Type
Law of Supply
The principle that an increase in price results in an increase in supply.
Law of Demand
The principle that an increase in demand results in an increase in price.
Related Concepts

Price Economics

This is the complete list of articles we have written about price economics.
Bargaining Power
Commoditization
Competition
Competitive Market
Customary Pricing
Demand
Dumping
Equilibrium
Inferior Good
Law Of Demand
Market Forces
Market Value
Perfect Competition
Predatory Pricing
Price Competition
Price Floor
Price Optimization
Price Sensitivity
Price Stability
Price Umbrella
Price War
Pricing Strategy
Relative Price
Snob Effect
Sticky Prices
Superior Good
Supply
Supply & Demand
Too Cheap To Meter
Veblen Goods
Willingness To Pay
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Price Economics

A list of price economics principles and theories.

Willingness To Pay

A list of factors that influence willingness to pay.

Sticky Prices

Prices that stick to an established range and resist changing economic forces such as inflation.

Commoditization

A definition of commoditization with examples.

Too Cheap To Meter

A definition of too cheap to meter with examples.

Relative Price

The definition of relative price with examples.

Dumping

An overview of dumping with an example.

Value vs Price

The difference between value and price with examples.

Market Value

The definition of market value with examples.

Competitive Market

A complete overview of competitive markets with examples.

Economics

Everyday examples of economics.

Economics Definition

The definition of economics with examples.

Comparative Advantage Examples

The definition of comparative advantage with examples.

Supply

The definition of supply with examples.

Supply And Demand

An overview of supply and demand with examples.

Demand Examples

Common examples of demand in economics.

Shrinkflation

The common types of shrinkflation.

Quality Bias

The definition of quality bias with examples.

Value

The five common definitions of value with an example.

Scale

An overview of economic scale with examples.
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