Published August 16, 2023 • 4 Min Read
The foundation of all economic theory lies with “supply” and “demand.” Supply is the number of goods or services available to be sold, and demand is the number people willing to buy. The price of goods and services is determined at the intersection point where supply equals demand.
Too much supply, not enough demand
Think about a store owner with items left unsold. When the supply of a product increases, but demand stays the same, the retailer may reduce the price, hoping to increase demand for the product (and sell through their remaining inventory). It’s important to understand that the price of a product moves in the opposite direction to the supply available. When supply goes up, price goes down.
More demand, not enough supply
The opposite is true for demand: If there’s not enough supply to meet the demand, the price usually increases. For example, if an influencer posts a positive review of a product, this can increase the demand for that produce with followers. This could lead to an increase in the price of the product, as demand increases and available products become scarce. Price moves in the same direction as the demand for the product. When demand goes up, price also goes up.
How does this impact everyday life?
1. Pricing of goods and services: This is best seen during end-of-season sales — when a retailer’s supply exceeds demand. For example, a clothing store has a number of winter coats left in March, as the weather becomes warmer. To sell off leftover inventory, the retailer will often reduce prices, driving demand for the lower-priced coats. Alternately, if something popular is rare or more difficult to find, like a limited edition designer handbag, the scarcity of that handbag, will drive premium pricing.
2. Job opportunities: The theory of supply and demand can also be found in the job market. If demand for a particular skill increases, but the supply of that skilled labour is in short supply, the ability to secure a job or request higher wages may be more favourable. For example, in 2022, wages for scientific and technical jobs — those that require higher levels of education and specialized training — were double that of hospitality and food services on average.
3. Housing market: Supply and demand also affects the housing market and directly impacts price. When there is a short supply of houses on the market and demand for those houses is high, the prices often rise and may even cause a bidding war. This is what’s referred to as a seller’s market because sellers can obtain more money for their home. When the supply of houses on the market exceeds demand, prices tend to drop in order to sell. This is called a buyer’s market.
4. Stock market: While it’s not the only factor that influences a stock or other security’s price, the financial market is highly driven by supply and demand. An increased demand for a particular security can lead to an increase in the price of that security, and a lack of demand can lead to a price decline.
5. Product availability: Supply and demand also impact product availability on store shelves, as manufacturers use the demand to determine the supply they are willing to produce. If demand rises unexpectedly, like during the pandemic, the available inventory can be depleted. If supply exceeds what consumers want to purchase, excess inventory remains, and a brand may reduce or discontinue making an item.
Supply and demand are the bedrock on which economies are built; they shape the prices of goods and services, influence production decisions, and guide markets. As markets change, supply and demand will remain an essential compass, guiding consumers through the labyrinth of choice and opportunity.
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.
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