Supply and demand

Maria is selling cakes. She's been doing that for a while now. Lately she's been experimenting a bit with the price. And she has started to see a pattern. Maria has noticed that when she sets a very low price, then a lot more people buy cakes.

And when she sets a high price, much fewer people buy from her. To study this relationship, Maria draws a diagram. On the Y axis, she writes price. And on the X axis, how many cakes she's selling: what quantity. When she marks in the observations she made, they form a fairly smooth line, sloping downward.

This line describes a relationship between price and quantity. This relationship is the demand for cakes. Maria has noticed another thing. On weekends, and holidays, when people really want cakes, and are prepared to pay a bit more for them... ... then there are also more people out there, selling cakes.

This too is a relationship: The higher the price you can charge for a cake, the more people are willing to spend their time baking cakes and selling them. And this relationship is also between price and quantity, but it doesn't describe the demand, but the supply of cakes. And the supply curve, is sloping upwards. A high price, leads to many cakes for sale -- a large supply. A low price, leads to fewer cakes for sale -- a low supply.

As long as people can start buying or selling cakes when they want, ... and as long as Maria and the other cake sellers can decide what price to charge for the cakes, you can be pretty sure that the price will end up... ... here. ... and that the number of cakes that will be sold ends up... ... here.

This diagram is describing the market for cakes on Maria's street, and right now that market is in equilibrium. The supply balances the demand. Everyone who is prepared to produce cakes at this price, does so. Everyone who is willing to buy a cake at this price, does so. And all cakes that are made, are sold.

We call this kind of relationship between supply and demand a market, even if it's not stuff sold in market stalls on the street. There's a market for used cars, and there, the relationship is the same. If cars drop in price, then more people are willing to buy them. And if people are prepared to pay more for a car, then more people will be willing to sell them. It's not only stuff that's traded in a market.

Take the labour market. The supply: that's all who work. If companies raise salaries, meaning they are prepared to pay a higher price for work, then more people will be willing to take those jobs. And conversely: if everyone requires a higher price -- salary -- then companies aren't going to hire as many people. There's a housing market, where the supply is all the houses and apartments that someone might want to sell or rent... ...

and the demand is everyone who wants to move into those places and have somewhere to live. Different markets work differently. This model, with supply and demand, is the basis for all markets, but it's not the full picture. Take cakes for instance. It's nice to have cake, if you can afford it, but you'll do fine without it too.

Work and housing on the other hand, are things that everyone needs. So these markets are something that most countries choose to influence, through political decisions and laws. It's not so common to see a political debate or a new law regulating cakes.