Understanding the Supply and Demand Curve

Most of us know that supply and demand form the basis for Capitalism itself. During the analysis process, sometimes it's easier to be able to visualize the forces of supply and demand. That's where the supply and demand curve comes into its own.


Supply is the amount of a product that's available to the marketplace at any given time. For instance, the supply of gasoline is all available gasoline in filling stations and at refineries today. Supply forms one half of the supply and demand curve, sloping up and to the right.


Demand is the amount of money that the market will pay for any given item.
Using our previous example, it's what successful filling stations are charging for gasoline. Demand forms the other half of the supply and demand curve, and it slopes downward and to the right.

The Supply and Demand Curve

The supply and demand curve is actually two curves in one. One represents supply, the other represents demand. Where they meet in the middle is known as the equilibrium point. It's at this point that analysts predict most of a commodity will sell at a given price.

The supply and demand curve isn't perfect, it assumes that there is no waste or delays in supplying a given product at a given price. In practice, this means that the curve varies a few percentage points in both directions. Equilibrium can be predicted, but only in terms of a given likelihood with a certain margin of error.

Shifts in Supply and Demand

Shifts in both supply and demand move their individual curves. An increase in demand moves its curve to the right, while a decrease in demand moves in to the left. In the same way, an increase in supply can move its curve to the left or right. This causes a shift in the point of equilibrium, and can cause big jumps and declines in the price of a given commodity.

Plotting the Supply and Demand Curve

In order to plot a supply and demand curve, you have to know a few things. Of course, you must know what the current supply of a given commodity is, and you must know the demand for it in the marketplace. You also have to plot the curve for a given amount of time, usually quarterly, which forms the X-axis. The Y-axis varies depending on whether you're looking at supply or demand. For supply, the Y-axis represents the amount of a given commodity that's available to consumers. For demand, it represents the price that consumers are willing to pay.

Using the Supply and Demand Curve

In order to make use of the supply and demand curve, you first need to make some educated guesses about the marketplace. Does supply spike with the season? For instance, with harvest-able crops like corn and wheat, there is a season where supply is high but demand is flat. This causes a price decrease. Does demand vary from season to season? With gasoline, demand is highest during the summer travel season, so the price goes up.

Although the supply and demand curve isn't a crystal ball, it can be very useful in analyzing a given commodity, or even a service. Being able to read supply and demand curves, then make an educated analysis of what you're looking at, is almost guaranteed to make you a better investor.
By Aaron Phillips
Aaron Phillips is a financial researcher and journalist based out of Michigan. He regularly writes the IG Daily and IG Weekly columns.

Copyrighted 2016. Content published with author's permission.

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