Supply and demand

Your favourite band announces a concert in Zürich. Tickets cost 80 francs – and sell out in twenty minutes. Two days later, the same tickets are being resold online for 200 francs. And some people are paying that much.

Something similar happens with limited-edition trainers: a manufacturer releases just a few thousand pairs of one model, and on the very first day they are already being resold at sky-high prices. At the other extreme, some products are wanted by hardly anyone – they sit on the shelves for ages and eventually end up in the sale with discount stickers on them.

Who actually decides what something costs? The surprising answer: in a market economy, it is usually no single person. Behind prices are two forces that are constantly at work – demand from buyers and supply from sellers. In this module, you will get to know each force separately. How they work together to determine a price is the subject of “Price formation and market equilibrium”.

Reflection question for this module: Where have you been a buyer this week – and who was on the supply side? Keep the question in mind: by the end of the module, you will find it easy to answer.

In “What is economics? Needs, goods and scarcity”, you learnt about needs and wants – from the basic need for food to wanting a new mobile phone. In the market, these become demand: wanting a good plus having the money and being willing to pay for it. Simply wanting something is not enough – if you neither have nor want to spend 5000 francs on an e-bike, you do not create demand for it.

The quantity demanded depends heavily on the price. Imagine the ice cream stand at an outdoor swimming pool: if a scoop costs 2 francs, lots of people treat themselves to two. If it suddenly costs 6 francs, most people think twice – some go without, while others switch to buying their ice cream at the supermarket next door.

This gives us the most important rule on the demand side:

• When the price rises, the quantity demanded falls.
• When the price falls, the quantity demanded rises.

Economists draw this as a downward-sloping curve: at the top left (high price), few people buy; at the bottom right (low price), many people buy. You will find it in blue in the chart below.

Back to the ticket puzzle: at 80 francs, far more fans wanted a ticket than there were places available. Even at 200 francs, enough fans are still willing to pay – demand for this concert is huge.

On the other side of the market are the suppliers – usually businesses, like those you met in “Economic activity: households, businesses and the state”: the bakery, the trainer manufacturer, the concert organiser. Supply is the quantity of a good that they want to produce and sell at a particular price.

Suppliers also respond to price – but in exactly the opposite way to buyers. Why? Sellers want their sales revenue to cover their costs and earn a profit. The higher the price, the more they have left over from each item sold – and the more worthwhile it becomes to produce extra quantities or enter the market in the first place.

For example, if a kilo of raspberries sells for 15 francs, it is worthwhile for a farm to plant extra rows, pay fruit pickers and harvest even the bushes furthest away. If the price falls to 3 francs, some farms prefer to leave the berries on the bushes – harvesting them would cost more than it brings in. The same applies on a smaller scale at a flea market: you would hardly part with your old games for 50 Rappen – but at 30 francs each, you would probably put half your collection up for sale.

So the rule on the supply side is:

• When the price rises, the quantity supplied rises.
• When the price falls, the quantity supplied falls.

Drawn on a graph, this gives an upward-sloping curve – shown in green in the chart below.

Demand and supply respond to more than just price. You should know these four factors:

• Trends and preferences: Social media hype can send demand soaring without any change in price – suddenly everyone wants the same water bottle or the same trainers. When the trend fades, the products are left on the shelves.
• Income: People with more money available demand more – after a holiday job, that concert ticket is more affordable than before. If income falls, people first cut back on things they want but do not urgently need.
• Season: In July, strawberries come from across the region – supply is high. In January, not a single one grows here; importing fruit takes a lot of effort and it is scarce – supply is low. Demand is seasonal too: ice cream in a hot summer, skis in winter, mandarins before Christmas.
• Number of suppliers: If two new pizza delivery businesses open in town, the total supply of delivered pizzas is greater than before. If a supplier closes down or a manufacturer stops production, supply shrinks.

Remember: Price affects demand and supply – but trends, income, the season and the number of suppliers also shift them. So whenever you notice a price change in everyday life, it is worth asking: what has just happened on the demand side – and what has happened on the supply side?

Let's connect this to the circular flow of the economy from “Economic activity: households, businesses and the state” and “The simple circular flow of the economy”: in goods markets – wherever goods and services are traded – households are usually the buyers and businesses the suppliers. You demand an ice cream; the kiosk supplies it.

But there is one market where the roles are reversed: the labour market. Here, households supply their labour – and businesses demand it. Someone looking for an apprenticeship is therefore a supplier of their labour; the business looking for apprentices is the buyer. Whether someone is a supplier or a buyer therefore depends on their role in the particular market, rather than on who they are.

You now know both forces of the market: downward-sloping demand and upward-sloping supply. In “Price formation and market equilibrium”, you will bring them together – and discover how they determine a price.