The law of supply and demand is a basic economic principle that explains the relationship between

supply and demand for a good or service and how the interaction affects the price of that good or
service. The relationship of supply and demand affects the housing market and the price of a house.

The law of supply and demand states when there is high demand for a good or service, the price of
the good or service rises. If there is a large supply of a good or service but not enough demand for it,
the price falls.

In the housing market, the law of supply and demand is prominent. Generally, each housing
transaction involves a buyer and a seller. The buyer places an offer for a property and the seller may
accept or reject the offer. The law of supply and demand dictates the equilibrium price of a property.

When there is a high demand for properties in a particular city or state and a lack of supply of quality
properties, the prices of houses tend to rise. When there is no demand for housing due to a weak
economy and an oversupply of properties is available, the prices of houses tend to fall.

For example, during the Great Recession, the United States experienced an economic downturn
from December 2007 until June 2009. The collapse of the real estate market in 2007 caused a
decrease in demand for properties, thus creating an oversupply of houses and decreasing properties
prices.

Law of Demand
REVIEWED BY JIM CHAPPELOW

Updated May 1, 2019

What is the Law of Demand?
The law of demand is one of the most fundamental concepts in economics. It works with the law
of supplyto explain how market economies allocate resources and determine the prices of goods
and services that we observe in everyday transactions. The law of demand states that quantity
purchased varies inversely with price. In other words, the higher the price, the lower the quantity
demanded. This occurs because of diminishing marginal utility. That is, consumers use the first
units of an economic good they purchase to serve their most urgent needs first, and use each
additional unit of the good to serve successively lower valued ends.

KEY TAKEAWAYS

 The law of demand is a fundamental principle of economics which states that at a higher
price consumers will demand a lower quantity of a good.
 Demand is derived from the law of diminishing marginal utility, the fact that consumers
use economic goods to satisfy their most urgent needs first.
 A market demand curve expresses the sum of quantity demanded at each price across all
consumers in the market.
 Changes in price can be reflected in movement along a demand curve, but do not by
themselves increase or decrease demand.
 The shape and magnitude of demand shifts in response to changes in consumer
preferences, incomes, or related economic goods, NOT to changes in price.
Understanding the Law of Demand
Economics involves the study of how people use limited means to satisfy unlimited wants. The law of
demand focuses on those unlimited wants. Naturally, people prioritize more urgent wants and needs
over less urgent ones in their economic behavior, and this carries over into how people choose
among the limited means available to them. For any economic good, the first unit of that good that a
consumer gets their hands on will tend to be put to use to satisfy the most urgent need the consumer
has that that good can satisfy.

Law Of Supply
REVIEWED BY JIM CHAPPELOW

Updated May 1, 2019

What is the Law of Supply?
The law of supply is the microeconomic law that states that, all other factors being equal, as the
price of a good or service increases, the quantity of goods or services that suppliers offer will
increase, and vice versa. The law of supply says that as the price of an item goes up, suppliers
will attempt to maximize their profits by increasing the quantity offered for sale.

KEY TAKEAWAYS

 The law of supply says that a higher price will induce producers to supply a higher
quantity to the market.
 Supply in a market can be depicted as an upward sloping supply curve that shows how
the quantity supplied will respond to various prices over a period of time.
 Because businesses seek to increase revenue, when they expect to receive a higher price,
they will produce more.