Page 14 - Module 5 - Key_Players_in_the_financial_game

Module 5 – Understanding the game between the bulls and bears

the law that governs
supply and demand
Does Supply and Demand Only
What is the 'Law of Supply and
Demand' Affect Prices?
The law of supply and demand
is the theory explaining the The law of supply and demand does not just apply to
interaction between the prices. It may also describe other economic activity. For
supply of a resource and the example, if unemployment is high, there is a large supply
demand for that resource. The of workers. As a result, businesses tend to lower wages.
law of supply and demand Conversely, when unemployment is low, the supply of
defines the effect of the workers is also low, and as a result, to entice workers,
availability of a product and employers tend to offer higher salaries. Similarly, in the
the desire (or demand) for that world of stock investing, the law of supply and demand
product has on price. can help to explain a stock's price at any given time.

One of the most basic
economic laws, the law of
supply and demand ties into almost all economic principles in one way or another. In practice, supply
and demand pull against each other until the market finds an equilibrium price. However, multiple
factors affect both supply and demand, causing them to increase or decrease in various ways.

LOW SUPPLY + HIGH DEMAND = INCREASED PRICE

HIGH SUPPLY + LOWER DEMAND = REDUCE PRICE

how do supply and demand create an equilibrium price?
Equilibrium price (market-clearing price) = Price at which a producer can sell all the
units he wants to produce and the buyer
can buy all the units he wants.

Imagine a business brings out a new product. It sets a high price, but only a few consumers buy it.
The business predicted selling more units, but due to lack of interest, it has warehouses full of the
product. Due to its high supply, the business lowers the price. Demand increases, but as the
businesses supply declines, it raises the price until it finds the perfect price to balance its supply with
consumer demand.

what factors affect supply?
Supply only considers the supply created by a single business. In real economies, supply is predicated
on many other factors. Production capacity, production costs such as labour and materials, and the
number of competitors directly affect how a much supply businesses can create. Ancillary factors
such as material availability, weather and the reliability of supply chains can also affect supply.

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