What are demand and supply?
Demand is how much people want to buy, and can afford, at a given price. The general rule: when the price falls people buy more, when it rises they buy less. If hilsa gets cheaper per kg, many families buy it twice a week instead of once.
Supply is how much sellers want to sell at a given price. When the price rises, sellers want to bring more to market, because it pays better. The market price settles roughly where the wish to buy meets the wish to sell. This is called the equilibrium price.
In September 2019, India stopped onion exports after rains delayed its harvest, and Bangladesh imports part of what it needs. People do not suddenly eat fewer onions, but supply at the bazar shrank. The result: local onions in Dhaka that cost about Tk 50 a kg two months earlier sold for Tk 240–250 by mid-November. Demand about the same, supply lower, so the price jumped.
Why it matters to an investor
- Share prices are set the same way: on the DSE, when more people want to buy a share than sell it, the price rises, and the reverse makes it fall. Day-to-day moves are mostly this tug-of-war.
- To read the news: once you understand phrases like “supply chain problems” or “demand has weakened”, you can see why a price or a business’s income is changing.
- To understand inflation: when demand across the whole economy grows faster than supply, the general price level rises. Inflation is demand and supply on a large scale.
- Interest is a price too: interest rates are shaped by the demand to borrow and the supply of money to lend, along with the central bank’s policy.
A price change versus a shift in demand or supply
Two different things are easy to mix up. When the price changes, people buy more or less: that is movement along the same demand. But when something other than the price changes, the whole of demand or supply shifts, meaning people now want to buy or sell more or less at the same price.
- Demand shifts when: incomes rise or fall (an Eid bonus, remittances), tastes or seasons change (dates in Ramadan, warm clothes in winter), the price of a substitute changes, or people expect prices to rise later.
- Supply shifts when: weather damages a crop, fuel or raw-material costs change, imports are blocked or eased, or new technology makes production cheaper.
People do not react the same way to every price
For essentials like rice, medicine or onions, people do not cut back much even when the price rises a lot, because there are few alternatives. So a small shortfall in supply can make the price leap. Economists call this “inelastic” demand.
For things like eating out, a new phone or a holiday, people easily hold back or wait when prices rise. Their demand is “elastic”. What a business sells shapes how well its sales hold up in hard times.
Why prices work as signals
- Higher prices tell producers and traders that a thing is in demand, so they grow more or import it from elsewhere. During the 2019 shortage, onions from Myanmar and Egypt also appeared in Dhaka’s markets.
- Higher prices tell buyers the thing is scarce now, so they use less or look for substitutes.
- Together these responses tend to pull the price back down over time. So a sudden spike often does not last forever, though nobody can say in advance how fast it will ease.
Common mistakes
- Assuming “the price rose, so demand rose”. Prices can also rise because supply fell, exactly as with onions in 2019.
- Thinking a rising share price must mean the company is doing well. A price can rise just from buying pressure, which may not match the real state of the business.
- Panic-buying and stockpiling when a price spikes. When everyone does it at once, demand rises further and pushes the price even higher.
- Looking only at demand or only at supply. To understand a price you always need both sides.
To understand any price, ask two questions: how many want to buy, and how much is on offer? When either one shifts, the price moves.