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Economics: The Law of Supply and Demand

We have already talked about the Law of Supply, and the Law of Demand. Now, let us put them together and look at this basic law of economics, the Law of Supply and Demand.

Now, first, let us review the Law of Demand. The Law of Demand says, the more expensive something is, the less people will buy it. Also, the more people want something, the more expensive it will get.

For the Law of Supply, it says that the more expensive something is, the more people will sell it. On the other hand, the more sellers there are, the cheaper the “something” will get.

If we put those together, there are two things that we see right away. First, buyers will always want to buy at the cheapest price that they can. Second, sellers will always want to sell at the highest price that they can. The Law of Supply and Demand states: buyers and sellers have to agree on a price together.

The Law of Supply and Demand also looks at how the buyers and sellers change prices without meaning to. First, the more buyers who want something, the higher the price will go. Second, the more sellers who sell the same thing, the lower the price will go. Let us illustrate.

Let us go back to our bottled water. Most buyers would happily get bottled water at 5 cents. Most sellers would happily sell bottled water at 50 dollars. These two groups need to agree on a middle price that they are both happy with.

Now, the middle price of bottled water really depends on the number of buyers and sellers. For example, on one day, there are 30 bottles of water for sale at 15 dollars. However, 40 students want to buy water. The sellers raise the price to 18 dollars. The not-thirsty students and some of the thirsty-later students might lose interest. However, the thirsty-now to the dying-of-thirst students will still pay the higher price.

Now, let us look at the sellers’ side. The sellers want to earn, and they are in competition with each other. Sellers always want the prices to be higher so that they earn more. But, they also want to earn more than one another. For example, Seller John wants to earn more than Seller Tom. To get more buyers, Seller John sells water at 19 dollars 50 cents, if Seller Tom is selling at 20 dollars.

Seller Tom notices, and sells bottled water at 19 dollars. But there is another Seller, Seller Maria, who wants the customers of both Seller John and Seller Tom. So Seller Maria sells her bottled water at 18 dollars.

The Law of Supply and Demand works because the buyers and sellers need to agree on a price that the buyers can pay while the sellers can earn. So even if a buyer wants to pay 15 dollars for water, he might decide to pay 18 because he is thirsty and there is nothing cheaper. A seller might want to sell at 20 dollars, but sells at 18 instead because everyone else is selling around 18 dollars.

To repeat, the Law of Supply and Demand works through two things. First, the buyers and sellers need to agree on a price for something. Second, the number of buyers and sellers change the agreed price.

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