The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will demand that good. In other words, the higher the price, the lower the quantity demanded.
The amount of a good that buyers purchase at a higher price is less because as the price of a good goes up, so does the opportunity cost of buying that good. As a result, people will naturally avoid buying a product that will force them to forgo the consumption of something else they value more.
The law of demand and it's application to fundamental analysis of commodities rests upon an understanding of consumer behaviour. The factors which characterize consumer choice, and how individual consumer responses are reflected in the market place are key components of this economic theory. Understanding what factors have affected demand in the past will help to develop expectations about demand in the future and the impact on market price.
The Law of Supply
Like the law of demand, the law of supply demonstrates the quantities that will be sold at a certain price. But unlike the law of demand, the supply relationship shows an upward slope. This means that the higher the price, the higher the quantity supplied. Producers supply more at a higher price because selling a higher quantity at a higher price increases revenue.
Supply joins demand as one of the components of fundamental commodity market analysis. Supply characteristics relate to the behaviour of firms in producing and selling a product or service. An understanding of the factors affecting supply in the past will help with the development of supply expectations in the future and the impact upon market price.
The law of supply can be approached from two different contexts. The first is that it represents the sum total of production plus carryover stocks. The other context for supply describes the behaviour of producers. The market or total supply represents the quantities producers are willing to sell over a range of prices for any given time period. At the individual level, you may be willing to produce a given product as long as the market price is equal to or greater than the cost of producing that product. The total supply is the sum of the individual quantities of product that each farmer brings to the market.
Market supply is represented by an upward sloping curve with price on the vertical axis and quantity on the horizontal axis .
Supply and Demand Relationship
Now that we know the laws of supply and demand, let's turn to an example to show how supply and demand affect price. Imagine that a special edition CD of your favorite band is released for $20. Because the record company's previous analysis showed that consumers will not demand CDs at a price higher than $20, only ten CDs were released because the opportunity cost is too high for suppliers to produce more. If, however, the ten CDs are demanded by 20 people, the price will subsequently rise because, according to the demand relationship, as demand increases, so does the price. Consequently, the rise in price should prompt more CDs to be supplied as the supply relationship shows that the higher the price, the higher the quantity supplied
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