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Supply and Demand

Definition

Supply and demand is an economic model that determines price levels in a market based on the availability of a product (supply) and the desire for that product (demand).

Analogy

Picture supply and demand as a seesaw on a playground. The balance point, where the seesaw doesn't tilt one way or another, represents the ideal price point. If there are too many kids (products) on one side (oversupply), it will lower that side (price drops). If more kids want to ride (high demand), they'll have to wait their turn or convince someone else to get off by offering something valuable (price increases).

Related terms

Equilibrium Price: This is the price at which supply equals demand. It's like finding just the right amount of allowance money where you're happy with what you can buy, but also not spending all your savings.

Shortage & Surplus: A shortage occurs when demand exceeds supply (like when everyone wants the latest video game console, but there aren't enough to go around). A surplus is when supply exceeds demand (like having too many apples after apple picking).

Price Elasticity: This measures how much the quantity demanded or supplied changes with a change in price. It's like seeing how much more candy you'd buy if the price dropped by half.