Supply / Demand
Explain a price change or shortage by separating supply and demand. Test shifts with evidence before recommending a response to the constraint.
- Demand
- Number of buyers
- How much each buys
- Supply
- Number of sellers
- Capacity of each
Watch out: Both sides often move at once; check both before naming a cause.
On a case
Tomato prices tripled in July.
- Supply
- Heavy rain damaged crops
- Trucks held up by floods
- Demand
- Steady: an everyday staple
Illustrative case. Figures and conditions below are assumptions for practice, not market data.
For the tomato price spike, ask whether less produce reaches the market or buyers demand more at each price. Rain damage and blocked trucks are supply hypotheses. A festival or substitution away from another food could be a demand hypothesis; the diagram assumes everyday demand is otherwise steady.
Request arrivals, crop yields, transport delays and comparable market prices. Falling arrivals alongside higher prices supports a supply constraint, but does not prove its precise cause. Prices tripling does not imply that quantity fell by two-thirds.
Separate an immediate response, such as restoring transport from unaffected areas, from longer-term resilience. Estimate spoilage and delivered cost before assuming extra shipments help. Do not infer a full demand curve from two observed prices when supply is changing too.
Sources and further reading
- OpenStax: supply, demand and equilibrium
Defines demand and supply at different prices and the idea of market equilibrium.