Episode 42.
Supply and Demand

Question:

Key Points:

• Wanting something is "demand"; providing something is "supply"
• If there is only 1 of something in the whole world and there is more than one person who wants that item, then the price of that item will continue to increase until all but one person is willing to pay that price
• As the number available goes up, the price goes down
• This is represented on a graph (see below) where the demand goes from the upper left to the bottom right and the supply goes from the bottom left to the upper right
• The x axis (horizontal) is the quantity and the y axis (vertical) represents the price
• The place where the supply and demand lines cross is where the natural price and quantity will be
• The lines are usually curves (not straight lines)
• Some items are "comodities", which means that any given item is exactly like any others (e.g. rice, oil, etc). This drives prices down because a consumer can easily switch to a different supplier and get the same good
• Companies try to convince their customers that their good is special and not a comodity by differentiating their product.
• If successful, then that company has a unique demand curve and then they are able to easily see how prices affect quantity and are then able to set the price in order to be at the location on the demand curve which maximizes their own profit.