The Importance of the Law of Supply and Demand

Supply and demand is one of the most important parts of economics and it is the strength of a market economy. Supply and demand set the price and the amount of a good that will be produced. When the demand is high the price will be less, but when the price is high the demand will be less.

Let's start by breaking down supply and demand. We need to understand the terms demand and supply. "Demand refers to quantity of a product or service is desired by buyers. Supply represents how much the market can offer. The association between price and how much of a good or service is supplied to the market is known as the supply relationship." (Unknown 2006)

Supply and demand can be a very complicated process. When we refer to economics most people usually refer to the Law of Supply and Demand. To understand the way the law of supply and demand works we have to break it down into two separate laws. The law of demand says, if all other factors remain equal, the higher the price of a good, the less people will demand that good. Basically the higher the price, the lower the quantity demanded. Just like the law of demand, the law of supply demonstrates the amount that will be sold at a certain price. This approach means that the higher the price, the higher the quantity supplied.

Supply and demand wouldn't work with out scarcity. Scarcity is also very complex subject. The term scarcity means that people want more than is available. Scarcity limits us in two different ways, as individuals and as a society. We can have scarcity without choice. We must choose which of their needs they will fulfill and which they will leave unfulfilled. When there is scarcity and choice, there is always a cost. "The cost of any choice is the option or options that a person gives up. " (Schenk 1997) For example, if you gave up the option of cooking dinner to go to the movies, the cost of going to the movies is not having dinner.